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%?

Question

Quizplus · Accepted Answer

To calculate the net cash flow from salvage value, we need to first calculate the book value of the asset. Using MACRS, the annual depreciation for 5-year property is 20% in the first year, 32% in the second year, 19.2% in the third year, 11.52% in the fourth year, and 11.52% in the fifth year.

So, the depreciation for the first two years would be:

Year 1: $39,000 x 20% = $7,800
Year 2: ($39,000 - $7,800) x 32% = $9,984

The book value after two years would be:

$39,000 - $7,800 - $9,984 = $21,216

Therefore, the net cash flow from the salvage value would be:

Salvage value - (book value x tax rate)
$19,000 - ($21,216 x 34%) = $18,904.80

Thus, the best choice is D.

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