You purchase a machine for $50,000, depreciated straight-line to a salvage value of $20,000 over its 6 year life. If the machine is sold at the end of the 6th year for $27,000, what is the after-tax cash flow from the sale, assuming your tax rate is 40%?
A. $21,200
B. $22,200
C. $24,200
D. $25,200
To determine the after-tax cash flow from the sale of the machine, we need to calculate the book value of the machine at the time of sale and then consider the tax impact.
1. Calculate the annual depreciation expense:
Annual depreciation expense = (Purchase price - Salvage value) / Useful life
Annual depreciation expense = ($50,000 - $20,000) / 6 = $5,000 per year
2. Calculate the book value of the machine at the end of the 6th year:
Book value = Purchase price - Accumulated depreciation
Accumulated depreciation = Annual depreciation expense * Years of use
Accumulated depreciation = $5,000 * 6 = $30,000
Book value = $50,000 - $30,000 = $20,000
3. Calculate the taxable gain or loss:
Taxable gain or loss = Selling price - Book value
Taxable gain or loss = $27,000 - $20,000 = $7,000
4. Calculate the tax on the gain (assuming a 40% tax rate):
Tax on gain = Taxable gain * Tax rate
Tax on gain = $7,000 * 0.4 = $2,800
5. Calculate the after-tax cash flow from the sale:
After-tax cash flow = Selling price - Tax on gain
After-tax cash flow = $27,000 - $2,800 = $24,200
Hence, the after-tax cash flow from the sale is $24,200.
Therefore, the correct answer is C. $24,200.