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.

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Answer #1

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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