Northern Inc.purchases an asset for $150,000.This asset 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 asset is sold at the end of four years for $40,000,what is the cash flow from disposal?

Question

Quizplus · Accepted Answer

The cash flow from disposal can be calculated by first determining the book value of the asset at the end of four years and then calculating the tax effect of the sale. 1. Calculate the total depreciation over four years:- Year 1: $150,000 * 20% = $30,000- Year 2: $150,000 * 32% = $48,000- Year 3: $150,000 * 19.2% = $28,800- Year 4: $150,000 * 11.52% = $17,280- Total depreciation = $30,000 + $48,000 + $28,800 + $17,280 = $124,0802. Calculate the book value at the end of four years:- Book value = Initial cost - Total depreciation = $150,000 - $124,080 = $25,9203. Calculate the gain on sale:- Gain on sale = Sale price - Book value = $40,000 - $25,920 = $14,0804. Calculate the tax on the gain:- Tax = Gain on sale * Tax rate = $14,080 * 20% = $2,8165. Calculate the cash flow from disposal:- Cash flow from disposal = Sale price - Tax = $40,000 - $2,816 = $37,184