Quick Computing installed its previous generation of computer chip manufacturing

Question

Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, whiclh originally cost $44 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $18.8 million. The firm's tax rate is 30%. what is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 1 decimal place.) After-tax cash flow million

Explanation / Answer

Annual depreciation=(Cost-Salvage value)/Useful Life

=($44million/5)=$8.8million/year

Hence book value as on date of sale=Cost-Accumulated Depreciation

=$44-(8.8*3)=$17.6million

Hence gain on sale=(18.8-17.6)=$1.2million

Hence after-tax cash flow=Sale proceeds-(gain on sale*Tax Rate)

=18.8-(1.2*0.3)

which is equal to

=$18.4million.

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