Reversing Rapids Co

Finance Dec 07, 2020

Reversing Rapids Co. purchases an asset for $106,591. This asset qualifies as a five-year recovery asset under MACRS. The five-year expense percentages for years 1, 2, 3, and 4 are 20.00%, 32.00%, 19.20%, and 11.52% respectively. Reversing Rapids has a tax rate of 30%. The asset is sold at the end of year 4 for $13,963.

Calculate After-Tax Cash Flow at disposal. Round the answer to two decimals.

Expert Solution

Computation of After-Tax Cash Flow at disposal:

Accumulated Depreciation = $106,591*(20%+32%+19.20%+11.52%) = $106,591*82.72% = $88,172.08

Book Value of machine = $106,591- $88,172.08 = $18,418.92

Loss on disposal = $13,963 - $18,418.92 = $4,455.92

Tax on Loss = Loss on Disposal * Tax rate = $4,455.92 * 0.30 = -$1,336.78

After-Tax Cash Flow at disposal = $13,963 - (-$1,336.78) = $15,299.78

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