Question

What is the expected after-tax cash flow from selling a piece of equipment if Litchfield Design purchases the equipment today for 50,000 dollars, the tax rate is 20 percent, the equipment is sold in 3 years for 9,000 dollars, and MACRS depreciation is used where the depreciation rates in years 1, 2, 3, 4, and 5 are 30 percent, 25 percent, 21 percent, 14 percent, and 10 percent, respectively?

What is the expected after-tax cash flow from selling a piece of equipment if Blue Eagle Consulting purchases the equipment today for 127,500 dollars, the tax rate is 10 percent, the equipment will be sold in 12 years for 100,000 dollars, and the equipment will be depreciated to 15,000 dollars over 15 years using straight-line depreciation?

Answer 1

question no 1

CFAT = Net Income + Depreciation + Amortization + Other Non-Cash Charges

Earnings Before Tax (EBT) = $50000 - $9000

EBT = $41000

depreciation value =

50000 for 1st year is 30% = 15000

1st year 5000 - 15000 = 35000

2nd year 35000 *25% = 8750

35000 - 8750 = 26250

3rd year 26250 *21% = 5512.5

26250 - 5512.5 = 20737.50

NET INCOME = 41000-(20% tax * 41000)

= 41000 - 8200 = 32800

CFAT = Net Income + Depreciation + Amortization + Other Non-Cash Charges

CFAT = 32800 + 20737.50+9000

CFAT = 62537.5

question no 2

CFAT = Net Income + Depreciation + Amortization + Other Non-Cash Charges

Net Income = $127500 - (10% TAX x $127500)

Net Income = $127500 - 12750

CFAT= $114750 + 100000 + 15000

CFAT= $229750

Net Income = $1,820,000 - (35% x $1,820,000)

Net Income = $1,820,000 - $637,000

Net Income = $1,183,000

CFAT = $1,183,000 + $180,000

CFAT = $1,363,000