Question

Western Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 20%. If the machine is sold at the end of two years for $50,000, what is the cash flow from disposal?

Answer 1

The cash flow from disposal of the machine is $48,440.

Step-by-step explanation:

To determine the cash flow from disposal of the machine, we need to calculate the tax effects and subtract them from the sale price. Here's how:

Calculate the accumulated depreciation over the 2 years using the MACRS percentages. The accumulated depreciation is $12,800 ($70,000× 0.2 + $70,000 ×0.32).Calculate the adjusted basis of the machine by subtracting the accumulated depreciation from the purchase price. The adjusted basis is $57,200 ($70,000 - $12,800).Calculate the taxable gain by subtracting the adjusted basis from the sale price. The taxable gain is $7,800 ($50,000 - $57,200).Calculate the taxes owed on the gain by multiplying the taxable gain by the tax rate. The taxes owed are $1,560 ($7,800 ×0.2).Finally, determine the cash flow from disposal by subtracting the taxes owed from the sale price. The cash flow from disposal is $48,440 ($50,000 - $1,560).

Answer 2

Western Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages- the cash flow from disposal is $46720

Step-by-step explanation:

Given that the four-year sale is at $50,000.

we know that the book value of the machine must be established in order to determine if a gain or loss has been incurred at disposal.

The depreciation schedule for the $70,000 machine is: given as

Year 1: $70,000 × 0.2000 = $14,000

Year 2: $70,000 × 0.3200 = $22,400

Accumulated Depreciation = $14,000 + $22,400 = $36,400

Book Value of machine = $70,000 - $36,400 = $33,600

Gain on disposal is $50,000 - $33,600 = $16,400

Tax on Gain = Gain on disposal × Tax rate = $16,400 &

times; 0.20 = 20% of $16,400=20/100*16400=3,280

After-Tax Cash Flow at disposal = $50,000 - $3,280 = $46,720