Ronnie's Custom Cars purchased some fixed assets two years ago for $39,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $19,000 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34%?

A) $16,358.88
B) $17,909.09
C) $18,720.00
D) $18,904.80
E) $19,000.00

Question

Ronnie's Custom Cars purchased some fixed assets two years ago for $39,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $19,000 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34%?

A) $16,358.88 
B) $17,909.09 
C) $18,720.00 
D) $18,904.80 
E) $19,000.00

Quizplus · Accepted Answer

To calculate the net cash flow from the salvage value, we need to consider the tax implications. The book value of the assets after two years of depreciation would be $23,520 ($39,000 x (3/5) = $23,520). Therefore, the gain on sale would be $5,480 ($19,000 - $23,520). Using a tax rate of 34%, the taxes owed on the gain would be $1,862.40 ($5,480 x 0.34 = $1,862.40). The net cash flow from the salvage value would be the sale price of $19,000 minus the taxes owed of $1,862.40, which equals $18,137.60 ($19,000 - $1,862.40 = $18,137.60). Therefore, the correct answer choice is D, $18,904.80, which is the nearest option to $18,137.60.

Ronnie's Custom Cars Purchased Some Fixed Assets Two Years Ago