Western Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages- <u>the cash flow from disposal is $46720</u>
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
<u>Accumulated Depreciation </u>= $14,000 + $22,400 = $36,400
<u>Book Value of machine </u>= $70,000 - $36,400 = $33,600
<u>Gain on disposal is</u> $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
<u>After-Tax Cash Flow at disposal</u> = $50,000 - $3,280 = $46,720
