Question

You purchased a machine for $1.04 million four years ago and have been applying straight-line depreciation to zero for its ten-year life. Your tax rate is 21%. If you sell the machine today (after four years of depreciation) for $810,000, what is your incremental, after-tax cash flow from selling the machine? Your total incremental cash flow will be $ (Round to the nearest cent.)

Answer 1

The incremental after-tax cash flow from selling the machine is $770,940. This figure is calculated by considering the machine's book value after depreciation, the sale price, and the taxes on the gains of the sale.

Step-by-step explanation:

To calculate the incremental, after-tax cash flow from selling the machine, we need to account for the depreciation expense and the tax effects of the sale. The machine was purchased for $1.04 million and is being depreciated over ten years, which means an annual depreciation of $104,000 (1.04 million / 10 years). After four years, the accumulated depreciation is $416,000 (4 years * $104,000), which leaves a book value of $624,000 (1.04 million - 416,000).

Since the machine is being sold for $810,000, there is a gain of $186,000 ($810,000 - $624,000). The tax on this gain is 21% of $186,000, which equals $39,060. To obtain the net cash flow, subtract the tax from the selling price giving us $770,940 ($810,000 - $39,060). Therefore, the incremental after-tax cash flow from selling the machine is $770,940.