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Teach Marine Contractors is planning to purchase a dredging pump which has a 3 year class life
Teach Marine Contractors is planning to purchase a dredging pump which has a 3 year class life. The depreciable basis of the machine is 100,000. The company's marginal tax rate is 40% if the company uses MACRS, and the machine is sold after two years for $20,000 what will be the after-tax cash flow associated with the disposal? (The table below provides the 3-yr MACRS rates.) Year 1 2 3 4 Percentage 33% 45% 15% 7% Select one a $ 13,200 b. $ 19,200 c$ 22.000 d. $ 11,000 e. 5 20,800
Expert Solution
The after tax cash flow is computed as shown below:
= Sales value + Tax saving on loss of sale of machine
Tax saving on loss is computed as follows:
= (Book value - Sales value ) x tax rate
= (cost of machine x (1 - depreciation rate in year 1 - depreciation rate in year 2) - Sales value) x tax rate
= ($ 100,000 x (1 - 0.33 - 0.45) - $ 20,000) x 40%
= ($ 22,000 - $ 20,000) x 40%
= $ 800
So, the after tax cash flow is as follows:
= $ 20,000 + $ 800
= $ 20,800
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