Quick Computing installed its previous generation of computer chip manufacturing
ID: 2789225 • Letter: Q
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, which originally cost $40 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $18 million. The firm’s tax rate is 35%. What is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 1 decimal place.)
Explanation / Answer
First, let us calculate the book value of machine
book value of machine = cost - accumulated depreciation
since straight line depreciation is used
annual depreciation will be $40 million / 5 years
=>$8 million
=>$40 million - [($8 million)* 3 years]
=>$40 million - $24 million
=>$16 million.
the following table shows the after tax cash flow from sale of equipment:
Sale amount $18 million less: book value ($16 million) gain $2 million less: tax @35% ($0.7 million) after tax gain $1.3 million add: book value $16 million after tax cash flow from sale $17.3 millionRelated Questions
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