Question

Five years ago, your firm purchased a giant crane for $20 million dollars. It has an expected life of twenty years (from the date of purchase). Today the market value of the crane is $16 million. The corporate tax rate is 35%. Assume straight-line depreciation. What are the cash flows associated with selling the crane today?

Answer 1

We start with finding the depreciation value per year as per straight line method assuming that salvage value at the end of life of crane is 0.

Depreciation per year = ($20-0)/20 = $1 million

Expected value of crane after 5 years = $20 - (5)*($1) = $15 million

But the market value of the crane is $16 million, hence a profit of $16-$15 = $1 million

Since the firm incurs a profit on selling, it needs to pay corporate tax which is 35% .

Therefore, net cashflow is given as

$1 * (1-0.35) = $0.65 million

Answer :- Cashflow associated with selling the crane is $0.65 million.