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m_a_m_a [10]
3 years ago
10

Western Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed de

preciation 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?
Business
1 answer:
Ne4ueva [31]3 years ago
8 0

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 &times; 0.2000 = $14,000

Year 2: $70,000 &times; 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 &times; 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

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