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14 July, 18:11

Rocky Top, Inc., purchased some seven-year MACRS welding equipment six years ago at a cost of $73,000. Today, the company is selling this equipment for $25,000. The tax rate is 33 percent. What is the aftertax cash flow from this sale? The MACRS allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

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  1. 14 July, 18:36
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    The aftertax cash flow from the sale is $ 19,976.

    Explanation:

    In the case given in the problem cash flow comprises of two things one is cash from sale and the second is cash payment or saving as result of this sale.

    In order to calculate tax saving/payment we first have to calculate tax base of the asset in order to determing profit/loss on disposal.

    Profit/loss on disposal Calculation

    Profit / (Loss) = Sale Price - Tax base = 25,000 - 73,000 (100-MACRS (86.61) %)

    Profit / (Loss) = 15,225.3

    As profit so Tax outflow = 15,225.3 * 33% = $ 5,024

    SO

    After Tax Cash flow from sale = 25,000 - 5,024 = $ 19,976
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