Question 4 A company buys new equipment at the beginning of the year for $60,000

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Question 4 A company buys new equipment at the beginning of the year for $60,000. Annual cash maintenance expenses are estimated to be $4,000. The old equipment with a cost of $50,000 and accumulated depreciation of $42,000 will be sold for $12,000 cash. For all equipment, the company uses the straight-line method with zero salvage value and a ten-year life. The tax rate is 30%. What are each of the amounts listed below? Cash paid for new equipment Cash paid for maintenance expense Tax saved/decreased from maintenance expense Cash received from sale of old equipment Tax paid on gain from sale of old equipment Cash paid for depreciation expense Tax saved/decreased from depreciation expense After-tax cash flow for the current year

Explanation / Answer

Cash Paid for new equipment = $ 60,000

Cash paid for maintenance expense = $ 4,000

Tax saved from maintenance expense = 4000* 30% = $ 1200

Cash received from sale of Old equipment = $ 12,000

Tax paid on gain from sale of old equipment = (Cash-Salvage Value)*30% = (12,000-0) *30% = $3,600(salvage value =0 since company used straigh line method with zero salvage value for all equipments)

Cash paid for depreciation expense = $ 0 ( since depreciation is a non cash expense)

Tax saved from depreciation expense = Depreciation * tax rate = 60,000/10 * 30% = 6000* 30% = $ 1800

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