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%

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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