Northwest Co. purchases an asset for $6,000. This asset qualifies as a seven-year recovery asset under MACRS. Benson has a tax rate of 30%
The seven-year expense percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is sold at the end of six years for $2,000, what is the cash flow from disposal?
What will be an ideal response?
Answer: The six-year sale is at $2,000. To begin with, the book value of the asset must be established to determine if a gain or loss has been incurred at disposal. The depreciation schedule for the $6,000 asset is:
Year 1: $6,000 × 0.1429 = $857.40
Year 2: $6,000 × 0.2449 = $1,469.40
Year 3: $6,000 × 0.1749 = $1,049.40
Year 4: $6,000 × 0.1249 = $749.40
Year 5: $6,000 × 0.0893 = $535.80
Year 6: $6,000 × 0.0893 = $535.80
Accumulated Depreciation = $857.40 + $1,469.40 + $1,049.40 + $749.40 + $535.80 + $535.80 = $5,197.20
Book Value of asset = $6,000 - $5,197.20 = $802.80
Gain on disposal is $2,000 - $802.80 = $1,197.20
Tax Gain on Loss = Gain on disposal × Tax rate = $1,197.20 × 0.3 = $359.16
After-Tax Cash Flow at disposal = $2,000 - $359.16 = $1,640.84
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