Bacon Signs 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%, etc. The firm has a tax rate of 40%. If the machine is sold at the end of two years for $50,000, what is the cash flow from disposal?
A) $50,000
B) $43,440
C) $39,875
D) $33,600

Question

Quizplus · Accepted Answer

The cash flow from disposal is the selling price minus the book value. The book value is the original cost minus the accumulated depreciation. The accumulated depreciation is the sum of the depreciation expenses for the years that the asset has been owned.The depreciation expense for year 1 is $70,000 * 20.00% = $14,000. The depreciation expense for year 2 is $70,000 * 32.00% = $22,400. The accumulated depreciation at the end of year 2 is $14,000 + $22,400 = $36,400.The book value at the end of year 2 is $70,000 - $36,400 = $33,600. The cash flow from disposal is $50,000 - $33,600 = $16,400.