Question

Joe's Wilderness Outfitters is considering replacing their point of sale system. The current system was purchased 10 years ago at a total cost of $70,000. It is being depreciated straight-line to a zero value over 20 years. If Joe sells the point of sale system for $34,000 what is the after-tax cash flow to Joe's Wilderness Outfitters? Use 30% for the effective tax rate.

$34,300

$33,700

$35,000

$34,800

Answer 1

Answer: The correct answer is $34,300

Annual Depreciation = (Initial Cost – Residual Value) / Useful Life
Annual Depreciation = ($70,000 - $0) / 20
Annual Depreciation = $3,500

Accumulated Depreciation = $3,500 * 10
Accumulated Depreciation = $35,000

Book Value = Initial Cost – Accumulated Depreciation
Book Value = $70,000 - $35,000
Book Value = $35,000

After Tax Salvage Value = Salvage Value – Tax rate * (Salvage Value – Book Value)
After Tax Salvage Value = $34,000 – 0.30 * ($34,000 - $35,000)
After Tax Salvage Value = $34,000 + 0.30 * $1,000
After Tax Salvage Value = $34,000 + $300
After Tax Salvage Value = $34,300