Quick Computing installed its previous generation of computer chip manufacturing

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 $43 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $18.6 million. The firm’s tax rate is 35%. 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

Straight line depreciation on equipment = 43 million /5 i.e 8.60

Book value as on today = 43 million -(8.60*63) i.e 17.20 million

Gain on sale of equipment = 18.60 million - 17.20 million i.e 1.40 million

Tax on gain = 1.40*0.35 i.e 0.49

After tax cash flow on sale of equipment = 18.60 million - 0.49 millon i.e 18.11 million

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