You purchased a machine for $1.18 million three years ago and have been applying
ID: 2786617 • Letter: Y
Question
You purchased a machine for $1.18 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 38%. If you sell the machine right now (after three years of depreciation) for $769,000, what is your incremental cash flow from selling the machine?
Your total incremental cash flow will be? (Round to the nearest cent.)
I got $668822.86 but its wrong.
To determine the total incremental cash flow, use the following formula: Incremental Cash Flow=Sale PriceTaxes, where Taxes equals left parenthesis (Sales Price Book Value)×Tax rate and Book Value equals = Original cost-(annual depreciation ×number of years owned).
Explanation / Answer
Depreciation/year=($1.18million/7)=$0.168571428million
Hence book value as on date of sales=$1.18million-(0.168571428*3)
=$674285.7143
Hence gain on sales=(769000- 674285.7143)=$94714.28571
Hence incremental cash flow=Sale proceeds-(Tax rate*Gain on sales)
=769000-(0.38*$94714.28571)=$733008.57(Approx).
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