Question

Cost recovery. ​ Richardses' Tree​ Farm, Inc. purchased a new aerial tree trimmer for ​$82,000. It is classified in the property class category of a​ single-purpose agricultural and horticultural structure. Then the company sold the tree trimmer after four years of service. If a​ seven-year life and​ MACRS, was used for the depreciation​ schedule, what is the​ after-tax cash flow from the sale of the trimmer​ (use a 35​% tax​ rate) if

a) the sales price was $30,000

b) the sales price was $25,616.80

c) the sales price was $22,000

If the sales price is a) $30,000 or b)$25,616.80​ or c)$22,000 what is the​ after-tax cash​ flow?

MACRS Fixed Annual Expense Percentages by Recovery Class         

Year	​3-Year	​5-Year	​7-Year	​10-Year
1	​33.33%	​20.00%	​14.29%	​10.00%
2	​44.45%	​32.00%	​24.49%	​18.00%
3	​14.81%	​19.20%	​17.49%	​14.40%
4	​ 7.41%	​11.52%	​12.49%	​11.52%
5		​11.52%	​8.93%	​9.22%
6		​ 5.76%	​8.93%	​7.37%
7			​8.93%	​6.55%
8			​4.45%	​6.55%
9				​6.55%
10				​6.55%
11				​3.28%

Answer 1

Book value of the trimmer after 4 years

Purchase price = 82000

Less: Depreciation

Year 1 : 14.29%*82000 = 11717.8

Year 2 : 24.49%*82000 = 20081.8

Year 3: 17.49%*82000 = 14341.8

Year 4: 12.49%*82000 = 10241.8

Book value = 25616.8

1: After tax cash flow = Sale price - (sale price – book value)*tax

= 30000- (30000-25616.80)*35%

=28465.88

2: After tax cash flow = Sale price - (sale price – book value)*tax

= 25,616.80- (25,616.80-25616.80)*35%

= 25,616.80

3: After tax cash flow = Sale price - (sale price – book value)*tax

= 22000- (22000-25616.80)*35%

=23265.88