A five-year MACRS asset that cost $50,000 with zero terminal value was sold at the end of its useful life for $20,000.The tax rate is 20%._____ is the net after-tax cash inflow resulting from the transaction.

Question

Quizplus · Accepted Answer

To calculate the after-tax cash inflow, we need to determine the book value and the gain or loss on sale.

Since the asset is a five-year MACRS asset, the depreciation schedule is:

Year 1: 20.00%
Year 2: 32.00%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%

The total depreciation over the life of the asset is $50,000, which means the book value at the end of year 5 is $0.

To determine the gain or loss on sale, we need to compare the selling price of $20,000 to the book value. Since the selling price is less than the book value, there is a loss on sale:

Book value = $0
Selling price = $20,000
Loss = $20,000 - $0 = $20,000

The tax rate is 20%, so the tax that needs to be paid on the loss on sale is:

Tax = Loss x Tax rate
Tax = $20,000 x 0.2 = $4,000

The after-tax cash inflow is the selling price minus the tax paid on the loss on sale:

After-tax cash inflow = Selling price - Tax
After-tax cash inflow = $20,000 - $4,000 = $16,000

Therefore, the answer is D) $16,000.

A Five-Year MACRS Asset That Cost $50,000 with Zero Terminal