Quick Computing installed its previous generation of computer chip manufacturing
ID: 2820502 • 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 $36 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $17.2 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
BUYING VALUE = 36 million
Life of asset = 5 years
Depreciation expenses = 36 / 5 =7.2 million per year
Total depreciation expense in 3 years = 7.2*3 = 21.6 million
Remaining book value = 14.4 million
Salvage Value = 17.2 million
Tax rate = 35%
So cash flow from selling the equipment will be :
Cash flow = salvage value - tax*(salvage valiue - book value)
Cash flow = 17.2 - 0.35*(17.2 - 14.4)
Cash flow = 16.2 millions
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