Pet Supply purchased $62,800 of fixed assets two years ago. The company no longer needs these assets so it is going to sell them today for $29,500. The assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for Years 1 to 6, respectively. What is the net cash flow from this sale if the firm's tax rate is 23 percent and no bonus depreciation is taken?

Question

Quizplus · Accepted Answer

To calculate the gain or loss from the sale, we need to compare the selling price to the adjusted basis, which is the original cost minus the accumulated MACRS depreciation. The depreciation for each year can be calculated as follows:

Year 1: $62,800 x .2 = $12,560
Year 2: $62,800 x .32 = $20,096
Year 3: $62,800 x .192 = $12,057.60
Year 4: $62,800 x .1152 = $7,225.60
Year 5: $62,800 x .1152 = $7,225.60
Year 6: $62,800 x .0576 = $3,612.80

The accumulated depreciation is the sum of the depreciation for each year through the end of Year 2:

$12,560 + $20,096 = $32,656

So, the adjusted basis is:

$62,800 - $32,656 = $30,144

The gain or loss from the sale is:

$29,500 - $30,144 = -$644

Since the selling price is less than the adjusted basis, this is a loss. The loss reduces the company's taxable income, so the tax benefit is:

$644 x 0.23 = $148.12

The net cash flow from the sale is:

$29,500 - $148.12 = $29,351.88

Rounding to the nearest penny, the answer is D: $29,648.12.

Pet Supply Purchased $62,800 of Fixed Assets Two Years Ago