Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

Quick Computing installed its previous generation of computer chip manufacturing

ID: 2820502 • Letter: Q

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 $36 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $17.2 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 1 decimal place.)

Explanation / Answer

BUYING VALUE = 36 million

Life of asset = 5 years

Depreciation expenses = 36 / 5 =7.2 million per year

Total depreciation expense in 3 years = 7.2*3 = 21.6 million

Remaining book value = 14.4 million

Salvage Value = 17.2 million

Tax rate = 35%

So cash flow from selling the equipment will be :

Cash flow = salvage value - tax*(salvage valiue - book value)

Cash flow = 17.2 - 0.35*(17.2 - 14.4)

Cash flow = 16.2 millions