Question

Cost recovery. ​ Richardses' Tree​ Farm, Inc. purchased a new aerial tree trimmer for ​$82,000. It...

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%

Homework Answers

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

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