Question

Your firm is selling a 3-year old machine that has a 5-year class life. The machine originally cost $580,000 and required an investment in net working capital of $20,000 at the time of installation (recoverable when the machine is no longer in use). Your firm is selling the asset for $180,000. Your firm's marginal tax rate is 34%. What is the cash flow effect from selling this machine?

Answer 1

Answer:

$ + 195593.6

Explanation:

First lets calculate the After depreciation net book value of the machine by computing depreciation as per MACRS 5-year class

Year 1 % Dep = 20%

Year 2 % Dep = 32%

Year 3 % Dep = 19.20%

So NBV of machine after 3 years

= 580,000 - (580000*0.20)-(580000*0.32)-(580000*0.1920)

=$167,040

We calculate the net taxable value of the gain as

=180,000 - 167040 = $12,960

Tax = 12960*0.34 = $4406.4

Thus the net cash flow proceeds from the sale of machine are as follows,

NCF = 180,000 - 4406.4 + 20,000 = $195593.6

where $20,000 is the freed working capital.

Hope that helps.