Use the following information to answer the question(s)below.
(Include the MACRS Table from the Appendix. )
Casa Grande Farms is considering purchasing multiple tractors for a total purchase price of $540,000.These tractors are expected to generate EBITDA of $250,000 for each of the next three years.Casa Grande Farms has a 21% tax rate and has a cost of capital of 10%.
-Assume that Casa Grande Farms is planning to sell the tractors after two years,when their book value is $119,988,for a total price of $180,000.What is the effect on free cash flow in the year they are sold?
A)A cash inflow of $60,012
B)A cash outflow of $60,012
C)A cash inflow of $47,949
D)A cash outflow of $47,949

Question

Quizplus · Accepted Answer

To calculate the effect on free cash flow in the year the tractors are sold, we need to calculate the gain or loss on the sale of the tractors. The book value of the tractors after two years using MACRS depreciation is $119,988. The sale price is $180,000, so the gain on the sale is $60,012 ($180,000 - $119,988). This gain is taxed at the company's tax rate of 21%, resulting in a tax payment of $12,616 ($60,012 * 0.21). Therefore, the net cash inflow from the sale of the tractors is $47,949 ($60,012 - $12,616), which is Option C.

Use the Following Information to Answer the Question(s)below