Question

Genetic Insights Co. purchases an asset for $14,116. This asset qualifies as a seven-year recovery asset under MACRS. The seven-year fixed depreciation percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. Genetic Insights has a tax rate of 30%. The asset is sold at the end of six years for $4,485.

Calculate After-Tax Cash Flow at disposal. Round the answer to two decimals.

Answer 1

The after tax salvage value is computed as shown below:

= Selling price - Tax on Profit on sale of asset

Tax on profit on sale of machinery is computed as follows:

= (Sales price - book value) x tax rate

Book value is computed as follows:

= Purchase price - (Sum of depreciation rates of year 1, 2, 3, 4, 5 and 6) x Purchase price

= $ 14,116 - (0.1429 + 0.2449 + 0.1749 + 0.1249 + 0.0893 + 0.0893) x $ 14,116

= $ 14,116 - 0.8662 x $ 14,116

= $ 1,888.7208

So, tax on profit is computed as follows:

= ($ 4,485 - $ 1,888.7208) x 30%

= $ 778.88376

So, the after tax salvage value will be computed as follows:

= $ 4,485 - $ 778.88376

= $ 3,706.12

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