Quick Computing installed its previous generation of computer chip manufacturing
ID: 2711193 • Letter: Q
Question
Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost $36.5 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $17.3 million. The firm’s tax rate is 30%. What is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 2 decimal places.)
Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost $36.5 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $17.3 million. The firm’s tax rate is 30%. What is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 2 decimal places.)
Explanation / Answer
Annual depreciation = cost of asset / life
= 36.50 Million / 5
=7.30 million per year
Total depreciation for 3 years = 7.30 million x 3
= 21.90 Million
Book value of asset after 3 years = Cost of asset - Total depreciation for 3 years
= 36.50 Million – 21.90 Million
=14.60
Cash flow from sale of asset = sale value – (sale value – book value) x tax rate
= 17.30 million – ( 17.30 million – 14.60 million)x30%
= 17.30 million -0.81 million
= 16.49 Million
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