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Reversing Rapids Co. purchases an asset for $133,270. This asset qualifies as a five-year recovery asset...

Reversing Rapids Co. purchases an asset for $133,270. This asset qualifies as a five-year recovery asset under MACRS. The five-year expense percentages for years 1, 2, 3, and 4 are 20.00%, 32.00%, 19.20%, and 11.52% respectively. Reversing Rapids has a tax rate of 30%. The asset is sold at the end of year 4 for $14,622.

Calculate After-Tax Cash Flow at disposal. Round the answer to two decimals.

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Answer #1

Answer : Calculation of After Tax Cash Flows :

After Tax Cash Flow = Salvage Value + Tax on Loss on Sale

Salvage Value at the end of year 4 = 14622

Tax on Loss on Sale = (Book Value - Salvage Value) * Tax Rate

Book Value at the end of year 4 = 133270 - [133270 * (0.20 + 0.32 + 0.192 + 0.1152)]

= 133270 - [133270 * 0.8272]

= 133270 - 110240.944

= 23029.056

Tax Saving on Loss on Sale = (14622 - 23029.056) * 30%

= 2522.1168

After Tax Cash Flow = 14622 + 2522.1168 = 17144.1168 or 17144.12

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