The Kleinman Corporation is considering selling one of its old assembly machines

Question

The Kleinman Corporation is considering selling one of its old assembly machines at
the start of a new capital project. The machine, purchased for $40,000 five years ago, had an expected life of 10 years and an expected salvage value of zero. Assume Kleinman uses straight-line depreciation, creating depreciation of $4,000 per year, and could sell this old machine for $45,000. Also assume a 34% marginal tax rate.



What is Kleinman Corp’s NET cash flow from the sale of the old assembly machine and what are the taxes associated with this sale?

Explanation / Answer

Tax payments associated with the sale for $45,000: Recapture of depreciation = ($45,000-$20,000) (0.34) = $8,500

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