Healthy Potions, Inc., a pharmaceutical company, bought a machine that produces

Question

Healthy Potions, Inc., a pharmaceutical company, bought a machine that  produces pain-reliever medicine at a cost of $2 million five years ago. The  machine has been depreciated over the past five years, and the current book  value is $700,000.  The company decides to sell the machine now at its market price of $1 million.  The marginal tax rate is 39  percent.

What are the relevant cash flows?

How do they change if the market price of the machine is $600,000 instead?

Healthy Potions, Inc., a pharmaceutical company, bought a machine that  produces pain-reliever medicine at a cost of $2 million five years ago. The  machine has been depreciated over the past five years, and the current book  value is $700,000.  The company decides to sell the machine now at its market price of $1 million.  The marginal tax rate is 39  percent.

Explanation / Answer

cash flow=1000000-700000=300000*(1-0.39)=183000

If sold at 600000

Loss=600000-700000=-100000

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