Question

A company using straight-line depreciation purchases an asset for $500 and is depreciating this asset to zero over its five year tax life. The company’s tax rate is 35%. If the company ends the project after four years and sells this equipment for $150, what is the after-tax cash flow from the sale of this asset?

Group of answer choices

$97.50

$167.50

$150

$132.50

Answer 1

Purchase price of Asset - $ 500

Given that the machine is to be depriciated with 0 Slavage Value on a straight Line Basis

Therefore Depriciation = Purchase Price/ Life of the machine

The life of the machine to be considered is 5 Years.

Therefore Depriciation P.A is = $ 500/5 = $100

Now, Depriciation For Four Years = $100 * 4 Years = $ 400.

Therefore Book Value of The machine after 4 Years = Purchase Price - Depriciation for 4 years = $500 - $400 = $100

Now, Sale Proceeds of the machine = $ 150

Therefore After Tax Cash flow from the sale of the machine can be caculated by using the below formula:-

After Tax Cash Flow = Sales Price - (Sale Price - Book Value)*Tax Rate

After Tax Cash Flow = $ 150 - ($ 150 - $ 100) * 0.35 = $ 132.50.

Therefore After Tax Cash Flow from the sale of Asset = $ 132.50