Billy's Plumbing Supplies is considering the purchase of an asset that costs $450 000 and is depreciated straight-line to zero over its six-year tax life.The asset is to be used in a four-year project;at the end of the project,the asset can be sold for $120 000.If the relevant tax rate is 30 per cent,what is the after-tax cash flow from the sale of this asset?

Question

Quizplus · Accepted Answer

To find the after-tax cash flow from the sale of the asset, we need to calculate the tax savings from the depreciation of the asset over the four years of the project, and then subtract the taxes on the gain from the sale of the asset.

First, we need to find the annual straight-line depreciation expense:
Depreciation expense = Cost of asset / Tax life
Depreciation expense = $450,000 / 6 = $75,000 per year

Over the four-year project, the total depreciation expense will be:
Total depreciation expense = Depreciation expense x number of years
Total depreciation expense = $75,000 x 4 = $300,000

The tax savings from the depreciation can be found by multiplying the total depreciation expense by the tax rate:
Tax savings = Total depreciation expense x Tax rate
Tax savings = $300,000 x 0.3 = $90,000

Next, we need to find the gain from the sale of the asset:
Gain on sale = Sale price - Book value
Book value = Cost of asset - Accumulated depreciation
Book value = $450,000 - $300,000 (total depreciation over the 4-year project)
Book value = $150,000
Gain on sale = $120,000 - $150,000
Gain on sale = -$30,000 (there is actually a loss on the sale, but for tax purposes we treat it as a gain of $0)

The taxes on the gain can be found by multiplying the gain by the tax rate:
Taxes on gain = Gain on sale x Tax rate
Taxes on gain = $0 x 0.3 = $0

Finally, we can calculate the after-tax cash flow from the sale of the asset by adding the gain to the tax savings:
After-tax cash flow = Gain on sale + Tax savings
After-tax cash flow = $0 + $90,000
After-tax cash flow = $90,000

Therefore, the after-tax cash flow from the sale of the asset is $90,000, which is closest to answer choice A, $129,000.

Billy's Plumbing Supplies Is Considering the Purchase of an Asset