The cash flow effect from selling this machine can be calculated as follows:
Step 1: Calculate the book value of the machine.
The book value of the machine can be calculated as follows:
Book value = Original cost - Accumulated depreciation
The accumulated depreciation can be calculated as follows:
Annual depreciation = Original cost / Class life
Annual depreciation = $580,000 / 5
Annual depreciation = $116,000
Accumulated depreciation = Annual depreciation x Years of use
Accumulated depreciation = $116,000 x 3
Accumulated depreciation = $348,000
Book value = $580,000 - $348,000
Book value = $232,000
Step 2: Calculate the tax effect of selling the machine.
The tax effect of selling the machine can be calculated as follows:
Tax effect = (Selling price - Book value - Net working capital) x Marginal tax rate
Net working capital is recoverable, so it does not affect the cash flow effect.
Tax effect = ($180,000 - $232,000 - $0) x 34%
Tax effect = -$18,320
The negative sign indicates that the tax effect is a tax benefit, which reduces the amount of taxes the firm has to pay.
Step 3: Calculate the cash flow effect of selling the machine.
The cash flow effect of selling the machine can be calculated as follows:
Cash flow effect = Selling price - Tax effect
Cash flow effect = $180,000 - (-$18,320)
Cash flow effect = $198,320
Therefore, the cash flow effect from selling this machine is $198,320.