Problem 10.6 Healthy Potions, Inc., a pharmaceutical company, bought a machine a

Question

Problem 10.6 Healthy Potions, Inc., a pharmaceutical company, bought a machine at a cost of $2 milion five years ago that produces pain-relilever medicine. The machine has been depreciated over the past five years, and the current book value is $720,000. The company decides to sell the machine now at its market price of $i million. The marginal tax rate is 31 percent. What are the relevant cash flows? Cash flows VIDEO CONCEPTS IN ACTION How do they change if the market price of the machine is $600,000 instead? Change in cash flow Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Total gain on sale of asset = asset selling price – book value

                                                = 1000000 – 720000

                                                = 280000

The gain on the sale of asset will be tax at 31%

Total tax = 280000* 0.31 = 86800

Net cash inflow = 280000 – 86800 = $193200

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