Question

Eastern Inc. purchases a machine for​ $15,000. This machine qualifies as a fiveminusyear 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%. Eastern has a tax rate of​ 20%. If the machine is sold at the end of four years for​ $4,000, what is the cash flow from​ disposal?

Answer 1

To find the cash flow from disposal, calculate the tax savings resulting from the depreciation of the machine and subtract it from the selling price. The cash flow from disposal is $2,033.37.

Step-by-step explanation:

To find the cash flow from disposal, we need to calculate the tax savings resulting from the depreciation of the machine.

Step 1: Calculate the depreciation expense for each year:

• Year 1: $15,000 * 20.00% = $3,000
• Year 2: ($15,000 - $3,000) * 32.00% = $3,840
• Year 3: ($15,000 - $3,000 - $3,840) * 19.20% = $2,099.52
• Year 4: ($15,000 - $3,000 - $3,840 - $2,099.52) * 11.52% = $893.62

Step 2: Calculate the total depreciation over the four years: $3,000 + $3,840 + $2,099.52 + $893.62 = $9,833.14

Step 3: Calculate the tax savings using the tax rate of 20%: $9,833.14 * 0.20 = $1,966.63

Step 4: Calculate the cash flow from disposal by subtracting the tax savings from the selling price: $4,000 - $1,966.63 = $2,033.37

Answer 2

The answer is given below;

Step-by-step explanation:

Cost of Machine $15,000

Depreciation year-1 ($15,000*20%) ($3,000)

Depreciation year-2 (15,000*32%) ($4,800)

Depreciation year-3 (15,000*19.2%) ($2,880)

Depreciation year 4 (15,000*.1152%) ($1,728)

Written down value $2,592

Sale proceeds from disposal $4,000

Gain on Sale ($4,000-2,592) $1,408

Tax on gain 1,408*20% ($282)

Net of Tax gain on sale $1,126