Rocky Top,Inc.,purchased some seven-year MACRS welding equipment six years ago at a cost of $73,000.Today,the company is selling this equipment for $25,000.The tax rate is 33 percent.What is the aftertax cash flow from this sale? The MACRS allowance percentages are as follows,commencing with Year 1: 14.29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 percent.

Question

Quizplus · Accepted Answer

The book value of the equipment after 6 years can be calculated using the MACRS allowance percentages as follows:

Year 1: $73,000 x 14.29% = $10,417
Year 2: ($73,000 - $10,417) x 24.49% = $14,065
Year 3: ($73,000 - $10,417 - $14,065) x 17.49% = $8,985
Year 4: ($73,000 - $10,417 - $14,065 - $8,985) x 12.49% = $5,484
Year 5: ($73,000 - $10,417 - $14,065 - $8,985 - $5,484) x 8.93% = $3,055
Year 6: ($73,000 - $10,417 - $14,065 - $8,985 - $5,484 - $3,055) x 8.92% = $2,432

The book value of the equipment after 6 years is therefore $54,448. The company is selling the equipment for $25,000, resulting in a loss of $29,448.

The tax shield from this loss can be calculated as follows:

Tax shield = Loss x Tax rate
= $29,448 x 33%
= $9,724.64

The aftertax cash flow from the sale can be calculated as follows:

Aftertax cash flow = Sale price + Tax shield - Book value
= $25,000 + $9,724.64 - $54,448
= $19,975.64, which is closest to option C, $19,975.65.