Question

x Corp. wants to buy a machine that can be used in a 10-year project. The machine costs $1,000,000; has a tax life of 10 years, and is depreciated using the straight-line method. The machine can be sold at the end of 10 years for $400,000. If the marginal tax rate is 20 percent, what is the after-tax cash flow from the sale of this asset (termination value of the machine)?

Answer 1

The after tax cash flow is computed as shown below:

The book value at the end of 10 years is computed as follows:

= Original cost of machine - 10 years of depreciation

= $ 1,000,000 - ($ 1,000,000 / 10) x 10

= $ 1,000,000 - $ 1,000,000

= $ 0

So, the profit will be as follows:

= Sales value - book value

= $ 400,000 - $ 0

= $ 400,000

So, the tax expenses will be:

= Profit x tax rate

= $ 400,000 x 20%

= $ 80,000

So, the after tax cash flow will be as follows:

= Sales value - tax expenses

= $ 400,000 - $ 80,000

= $ 320,000

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