Question

Ronnie's Custom Cars purchased some fixed assets two years ago for $125,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $64,500 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34 percent

Answer 1

After-tax cash flow = $62,970

Step-by-step explanation:

Using MACRS 5-year property

Year Rate

1 20.00%

2 32.00%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

Book value at the end of year 2 = $125,000 * (1 - 0.2 - 0.32)

Book value at the end of year 2 = $125,000 * 0.48

Book value at the end of year 2 = $60,000

Tax on sale = ($64,500 - $60,000) * 0.34

Tax on sale = $4,500 * 0.34

Tax on sale = $1,530

After-tax cash flow = $64,500 - $1,530

After-tax cash flow = $62,970