Suppose Fenner Manufacturing is considering the sale of a cutting machine that initially cost $40,000 and had a five-year economic life with no salvage value. The machine will be sold after taking three full years of straight-line depreciation. If the machine is sold for its book value, there will be no tax effect. If the machine is sold for more or less than its book value, there is a gain or loss that has a tax effect. Fenner has a 30 percent tax rate.
a. Show the effects on cash flow at the end of year 3 if the sales price is $25,000.
b. Show the effects on cash flow at the end of year 3 if the sales price is $14,000.