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A firm is trying to determine the cash flow from selling an old computer system to...

A firm is trying to determine the cash flow from selling an old computer system to an interested buyer. The computer system was purchased five years ago for $428,117.00. The system was depreciated using the 7-year MACRS schedule. The firm has an offer this morning for $48,659.00. The tax rate facing the firm is 38.00%. The firm will only accept the offer if it generates a cash flow greater than $48,608.00.

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Answer #1

cash flow from selling an old computer system = sale value - tax on sale

tax on sale = (sale value - book value)*tax rate

book value = cost of computer system - accumulated depreciation at the year of selling

7-year MACRS schedule has depreciation rates of 14.29%, 24.49%, 17.49%, 12.49% and 8.93% for year 1 to 5. it totals to 14.29%+24.49%+17.49%+12.49%+8.93% = 77.69‬%.

book value = $428,117.00 - ($428,117.00*77.69%) = $428,117.00 - $332,604.10 = $95,512.9‬0

tax on sale = ($48,659 - $95,512.9‬0)*38% = -$46,853.9*38% = -$17,804.48

cash flow from selling an old computer system = $48,659 - (-$17,804.48) = $48,659 + $17,804.48 = $66,463.48

cash flow from selling the computer system is greater than $48,608.00.

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