High Five Corporation purchased a machine for $75,000, including installation co

Question

High Five Corporation purchased a machine for $75,000, including installation costs. Annual straight line depreciation is $7,500. If High Five has a tax rate of 35%, what is the cash flow from disposal of the machine is sold at the end of six years for $15000? High Five Corporation purchased a machine for $75,000, including installation costs. Annual straight line depreciation is $7,500. If High Five has a tax rate of 35%, what is the cash flow from disposal of the machine is sold at the end of six years for $15000?

Explanation / Answer

since machine is sold at loss, it resulted in a capital loss which assumed to be available for set off against other taxable income of the entity.

In case the tax benefit can not be realised then net cash flow will be 15000 only.

Sale proceeds        15,000 Add: tax benefit           5,250 Net cash flow        20,250 Sale proceeds        15,000 Less: book value cost        75,000 less: accumulated depreciation        45,000 [7500*6] Net book value        30,000 Loss on disposal        15,000 tax benefit@35%           5,250

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