1. Asset was purchased for $2,000,000, a four-year life. Revenue generated by this asset will be $300,000 per year, operating expenses of $120,000 per year. The depreciation percentages :

Year	Depreciation rate
1	30%
2	44%
3	15%
4	188%
Total	100%

Assume that the total effective tax rate is 40%.

1. If the asset is sold for $120,000 at the end of its four-year life, would you have capital gain, capital loss, or depreciation recapture? Explain.
2. Please fill in the following table for years 0, 1, and 2, showing cash flow before taxes (CFBT), depreciation, taxable income, taxes, and cash flow after taxes.

Year	CFBT	Depreciation	Taxable Income	Taxes	CFAT
0
1
2

3. If the federal tax rate is 35% and the total effective tax rate is 40%, would the state tax rate be more than 5%, equal to 5%, or less than 5%? You may answer this question either by computing the state tax rate using the appropriate formula (s + (1-s) f), or by explaining your reasoning without doing any calculations.