Hunter's Paradise purchased $568,000 of equipment 4 years ago. The equipment is 7-year MACRS property. The firm is selling this equipment today for $199,500. What is the aftertax cash flow from this sale if the tax rate is 35 percent? The MACRS allowance percentages are as follows, commencing with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

Question

Quizplus · Accepted Answer

To calculate the aftertax cash flow from selling the equipment, we need to first calculate the adjusted basis, which is the original cost of the equipment minus the accumulated depreciation taken up to the point of sale.

To calculate the accumulated depreciation, we need to use the MACRS percentages given in the problem. The table below shows the annual depreciation amounts:

Year | MACRS Percentage | Depreciation Amount 
---|---|---
1 | 14.29% | $81,031
2 | 24.49% | $138,960 
3 | 17.49% | $99,409 
4 | 12.49% | $71,057 
5 | 8.93% | $50,763 
6 | 8.92% | $50,744 
7 | 8.93% | $50,763 
8 | 4.46% | $25,386

The total accumulated depreciation after four years is $518,310. Therefore, the adjusted basis is $568,000 - $518,310 = $49,690.

The sale of the equipment results in a gain of $199,500 - $49,690 = $149,810. However, this gain is subject to a 35% tax rate, so the aftertax cash flow from the sale is:

$149,810(1 - 0.35) = $97,364.50

Therefore, the correct answer is B.

Hunter's Paradise Purchased $568,000 of Equipment 4 Years Ago