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Reversing Rapids Co
Reversing Rapids Co. purchases an asset for $164,827. 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 $13,012.
Calculate After-Tax Cash Flow at disposal.
Expert Solution
MACRS rate for 4 years;
Year 1= 20.00%
Year 2= 32.00%
Year 3= 19.20%
Year 4= 11.52%
So,
Depreciation schedule for the $164,827 machine is as follows;
Year 1: $164,827× 0.2000 = $ 32,965.40
Year 2: $164,827× 0.3200 = $ 52,744.64
Year 3: $164,827× 0.1920 = $ 31,646.78
Year 4: $164,827× 0.1152 = $ 18,988.07
Accumulated Depreciation = $ 32,965.40 + $ 52,744.64 + $ 31,646.78 + $ 18,988.07
= $136344.89
Book Value of machine = $164,827- $136344.89
= $ 28482.11
Loss on disposal = $13,012-$ 28482.11
= -15470.11
Tax on Loss = Loss on disposal × Tax rate
= -15470.11 × 0.30
= - $4,641.03
After-Tax Cash Flow at disposal = $13,012 - ( - $4,641.03)
= $ 17,653.03
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