Custom Cars purchased $39,000 of fixed assets two years ago that are classified as 5-year MACRS property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.The tax rate is 21 percent.If the assets are sold today for $19,000,what will be the aftertax cash flow from the sale? Ignore bonus depreciation.
A)$16,358.88
B)$17,909.09
C)$18,720.00
D)$18,941.20
E)$19,000.00

Question

Quizplus · Accepted Answer

First, we need to calculate the book value of the assets after two years of depreciation:
Year 1: $39,000 x 20% = $7,800 (book value =$31,200)
Year 2: $31,200 x 32% = $9,984 (book value =$21,216)

The book value after two years is $21,216. Since the assets are sold for $19,000, there is a loss of $2,216. This loss can be used to offset taxable income, reducing the company's tax bill.

The tax shield from the loss is:
Tax shield = $2,216 x 21% = $465.36

The aftertax cash flow from the sale is:
Aftertax cash flow = Sale price - Tax on gain + Tax shield
Aftertax cash flow = $19,000 - ($19,000 - $21,216) x 21% +$465.36
Aftertax cash flow = $18,941.20

Therefore, the aftertax cash flow from the sale is $18,941.20. Option D is the correct answer.

Custom Cars Purchased $39,000 of Fixed Assets Two Years Ago