Quick Computing installed its previous generation of computer chip manufacturing
ID: 2715975 • 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 $45 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $19 million. The firm’s tax rate is 40%. What is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 2 decimal places.)
After-tax cash flow $ million
Explanation / Answer
The equipment is being depreciated on straight line basis over the life of 5 years.
At the end of the life the old equipment will become useless, hence the residual value of the equipment is Nil.
Annual depreciation = (Cost of equipment - Residual value of equipment) / Life of Equipment
= $45 million / 5 years = $9 million
It has been 3 years since the company is using the equipment.
Depreciation charged till now = $9 million * 3 = $27 million
Book value of the equipment now= Cost of equipment – Depreciation charged = $45 million - $27 million = $18 million
Selling price of the equipment now = $19 million
Capital gain = Selling price – Book value = $19 million - $18 million = $1 million
Tax rate = 40%
Tax on capital gain = $1 million * 40% = $0.40 million
After tax cash flow from sale of equipment = Selling price – tax on capital gain = $19 million - $0.40 million = $18.60 million
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