A. A fixed asset is classified as 5-year MACRS property and has an initial cost

Question

A.

A fixed asset is classified as 5-year MACRS property and has an initial cost of $41,000 What is the aftertax cash flow from the sale of this asset if the pre-tax salvage value at the end of year 3 is $17,500 and the tax rate is 34 percent?

$15,439.38

$15,558.04

$15,564.72

$15,463.06

B.

A firm has sales for the year of $95,500, costs of $48,500, and taxes of $19,000. What is the operating cash flow for the year?

$21,000

Answer cannot be determined from the information provided.

$28,000

$32,000

A fixed asset is classified as 5-year MACRS property and has an initial cost of $41,000 What is the aftertax cash flow from the sale of this asset if the pre-tax salvage value at the end of year 3 is $17,500 and the tax rate is 34 percent?

Explanation / Answer

Answer to Question A:

Initial Cost of Asset = $41,000

Depreciation Year 1 = $41,000 * 20%
Depreciation Year 1 = $8,200

Depreciation Year 2 = $41,000 * 32%
Depreciation Year 2 = $13,120

Depreciation Year 3 = $41,000 * 19.2%
Depreciation Year 3 = $7,872

Book Value of Asset at the end of Year 3 = $41,000 - $8,200 - $13,120 - $7,872
Book Value of Asset at the end of Year 3 = $11,808

Salvage Value = $17,500
Tax Rate = 34%

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $17,500 - ($17,500 - $11,808) * 0.34
After-tax Salvage Value = $15,564.72

Answer to Question B:

Operating Cash Flow = EBIT + Depreciation - Taxes

So, we cannot determine the answer as we need depreciation as well.

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