Disquotek, Inc., is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: Old Equipment New Equipment
Purchase cost $12,000 $36,000
Annual amortization 1,500 4,500
Remaining useful life (years)8 8
Current selling price 14,400 not applicable
Selling price in 8 years 1,000 2,000
Annual operating costs 14,000 8,000
The after-tax cash flows from selling the old equipment are:

Question

Quizplus · Accepted Answer

The after-tax cash flow from selling the old equipment is calculated as the selling price minus the tax on the gain. The gain is the selling price ($14,400) minus the book value ($12,000 - $1,500 * 8 = $0). The tax on the gain is 40% of $14,400, which is $5,760. Therefore, the after-tax cash flow is $14,400 - $5,760 = $8,640. However, since the book value is $0, the entire selling price is taxable, so the after-tax cash flow is $14,400 - $5,760 = $8,640.