Required information Four years ago, Sierra Instruments of Monterey, California,

Question

Required information Four years ago, Sierra Instruments of Monterey, California, spent $200,000 for equipment for manufacturing standard gas flow calibrators. The equipment was depreciated by using Modified Accelerated Cost Recovery System (MACRS) using a 3- year recovery period. For year 4, gross income (GI) was $100,000, operating expenses (OE) was $50,000, and Te was 34%. Develop hand and/or spreadsheet solutions for year 4 only that determine the cash flow after taxes (CFAT) if the asset was disposed of as indicated below. (Neglect any tax effects caused by the sale.) The asset was sold for $16.000 at the end of year 4 The CFAT is determined to be S 54039

Explanation / Answer

For MACRS 3-year asset class, depreciation for year 4 = $200,000 x 7.41% = $14,820

Taxable income (TI) ($) = GI - OE - Depreciation + Sale proceeds

= 100,000 - 50,000 - 14,820 + 16,000

= 51,180

After-tax Net income (NI) ($) = TI x (1 - Te) = 51,180 x (1 - 0.34) = 51,180 x 0.66 = 33,778.80

CFAT ($) = NI + Depreciation = 33,778.80 + 14,820 = 48,598.8 ~ 48,599 (rounded off)

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