Kewlin Hotels is considering replacing their heavy kitchen equipment

Finance Dec 25, 2020

Kewlin Hotels is considering replacing their heavy kitchen equipment. The equipment was purchased 4 years ago at a total cost of $20,000. It is being depreciated straight-line to a zero value over 8 years. If Kewlin sells the kitchen equipment for $10,000, what is the after-tax cash flow to Kewlin? (use 40% as the tax rate). $6,000 $4,000 $10,000 O $14,000

Expert Solution

The correct answer is $ 10000

Explanation

Original price of asset = 20000

Life = 8 years and salvage value = 0

So Depreciation per year = ( 20000 - 0)/ 8 = 2500

After 4 years the book value of machine is Cost - Depreciation for 4 years

= 20000 - ( 4* 2500)

= 10000

Sale value = 10000

Since the book value is equal to the sale value, there will be no taxes payable.

So after tax cash flow will be 10000

So $ 10000 is the correct answer

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