Western Inc.purchases a machine for $70,000.This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%.The firm has a tax rate of 20%.If the machine is sold at the end of two years for $50,000,what is the cash flow from disposal?

Question

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The cash flow from disposal is calculated by considering the sale price, the book value of the asset at the time of sale, and the tax implications. 1. Calculate the total depreciation over two years:- Year 1 depreciation: $70,000 * 20% = $14,000- Year 2 depreciation: $70,000 * 32% = $22,400- Total depreciation: $14,000 + $22,400 = $36,4002. Calculate the book value at the end of two years:- Initial cost: $70,000- Total depreciation: $36,400- Book value: $70,000 - $36,400 = $33,6003. Calculate the gain on sale:- Sale price: $50,000- Book value: $33,600- Gain: $50,000 - $33,600 = $16,4004. Calculate the tax on the gain:- Tax rate: 20%- Tax on gain: $16,400 * 20% = $3,2805. Calculate the cash flow from disposal:- Sale price: $50,000- Tax on gain: $3,280- Cash flow from disposal: $50,000 - $3,280 = $46,720