Question

# Compute the total cash flow generated if a corporation sells an old truck which was purchased...

Compute the total cash flow generated if a corporation sells an old truck which was purchased 2 years ago for \$100,000. It was depreciated as a 5 year MACRS asset. (Depreciation rate is .20 and .32 for year 1 and 2, respectively.)Assume the tax rate is 40%. Calculate the cash flows from this sale for case a and b below:

a) Assume it is sold for 70,000.
b) Assume it is sold for 10,000.

a)Sold for 70,000

Purchased for \$100,000

Total depreciation =\$100,000*.52(.20+.32)=\$52,000

Tax rat =40%

Book value =\$100,000-\$52,000 =\$48,000

So the machine with book value of \$48,000 was sold for \$70,000 so it was sold on profit

After tax cash flow from sale=Salvage Value-(Salvage Value-Book Value)*tax

\$70,000-(\$70,000-\$48,000)*40%

\$70,000-\$8,800 =\$61,200

b)Sold for \$10,000

Book Value =\$48,000

Sold for \$10,000 means it's sold at a loss so there's a tax refund (\$10,000-48,000) the loss would be of \$38,000 so tax refund would be 40% of \$38,000 that's\$15,200

After tax cash flow =\$10,000+\$15,200=\$25,200

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