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%?
$$\begin{array}{l}
\text { MACRS 5-year property }\
\begin{array} { c c }
\underline{\text { Year }} & \underline{\text { Rate} } \
1 & 20.00 \% \
2 & 32.00 \% \
3 & 19.20 \% \
4 & 11.52 \% \
5 & 11.52 \% \
6 & 5.76 \%
\end{array}
\end{array}$$

Question

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%? 
$$\begin{array}{l}
\text { MACRS 5-year property }\
\begin{array} { c c } 
\underline{\text { Year }} & \underline{\text { Rate} } \
 1 & 20.00 \% \
2 & 32.00 \% \
3 & 19.20 \% \
4 & 11.52 \% \
5 & 11.52 \% \
6 & 5.76 \%
\end{array}
\end{array}$$

Quizplus · Accepted Answer

To find the net cash flow from the salvage value, we need to calculate the tax savings from the sale of the old assets.

First, we need to calculate the adjusted basis of the assets. This is based on the MACRS depreciation schedule. We start with the original cost of $39,000 and subtract the depreciation taken in the first two years:

Year 1 depreciation: $39,000 * 0.2 = $7,800
Year 2 depreciation: $39,000 * 0.32 = $12,480
Adjusted basis = $39,000 - $7,800 - $12,480 = $18,720

Next, we need to calculate the gain or loss on the sale of the assets. The sales price is $19,000 and the adjusted basis is $18,720, so the gain is $280.

Since the assets were owned for more than one year, they qualify for long-term capital gains treatment. The tax rate on long-term capital gains for the given tax rate of 34% is 15%.

Therefore, the tax liability on the gain is: $280 * 15% = $42.

The net cash flow from the salvage value is the sales price minus the tax liability:
$19,000 - $42 = $18,958.

However, we have to take into account the tax savings from the loss of the fixed assets. The loss is the adjusted basis minus the sales price: $18,720 - $19,000 = -$280.

Since the tax rate is 34%, the tax savings from the loss is: -$280 * 34% = $95.20.

The final net cash flow from the salvage value is: $18,958 + $95.20 = $18,953.20, which rounded to the nearest cent is $18,904.80.

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