Depreciation and After-tax Cash Flow from Sale of Assets 2 Note to students: I have entered the value you should use as depreciable cost in cell B26. 3 Please see practice problems 12-13 and 12-14 for examples of depreciation schedules like this one. 4 5 Your firm needs a computerized machine tool lathe which costs $50,000, and 6 requires $12,000 maintenance for each year of its three-year life. After three years, 7 this machine will be replaced. The machine falls into the MACRS three-year class life 8 category. Assume a tax rate of 35 percent. 9 If the lathe is sold for $5,000 at the end of Year 3, what is the after-tax salvage value? 16 Salvage value (end of Year 3) 17 Marginal tax rate, Tc 18 19 Solution: 20 21 22 23 24 25 Fixed Asset and Depreciation Schedule: 26 27 MACRS depreciation % from Table 12.8 28 Depreciable cost 10 11 Learning Goal 12-3: Calculate a project's expected cash flows using the free cash flow approach. 12 Learning Goal 12-4: Explain how accelerated depreciation affects project cash flows. 13 14 Assumptions: 15 Cost of lathe 1. Set up Fixed Asset and Depreciation schedule 2. Calculate taxable gain or loss C $50,000.00 $5,000.00 35.00% 3. Calculate Tax impact = Tax on gain or tax benefit from loss 4. Compute ATCF = Selling price - Tax impact 29 Depreciation expense 30 Accumulated depreciation 31 Book value 32 Salvage value 33 Gain (loss) on sale of machine 34 Tax impact on sale 35 After-tax CF from sale of machine 36 37 38 0 $50,000.00 D 1 33.33% Year 2 44.45% E 3 14.81% 4 7.41% G H K

Problem 12-7/8: Depredation and After-tax Cash Flow from Sale of Assets Note to students: I have entered the value you should use as depredable cost in cell B26. Please see practice problems 12-13 and 12-14 for examples of depreciation schedules like this one. Your firm needs a computerized machine tool lathe which costs $50,000, and requires $12,000 maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACAS three-year class life category. Assume a tax rate of 35 percent. If the lathe is sold for $5,000 at the end of Year 3 , what is the after-tax salvage value? Learning Goal 12-3: Calculate a project's expected cash flows using the free cash flow approach. Learning Goal 12-4: Explain how accelerated deprediation affects project cash flows. is. 14 Assumptions: is Cost of lathe 16 Salvage value (end of Year 3) 1) Marginal tax rate, TC $50,000.00 in 19) Solution: 20 1. Set up Fixed Asset and Depreciation schedule 2. Calculate taxable gain or loss 3. Calculate Tax impact = Tax on gain or tax benefit from loss 4. Compute ATCF = Selling price - Tax impact 23 55,000.00 35.00% 25 Fixed Asset and Depreciation Schedule: 26 MACAS depreciation \% from Table 12.8 23. Depreciable cost 29 Depreciation expense 30 Accumulated depreciation in Book value 12 Salvage value 3) Gain (loss) on sale of machine 34. Tax impact on sale 15. After-tax CF from sale of machine 30. ri? Solution: 1. Set up Fixed Asret and Depreciation schedule 2. Calculate taxable gain or loss 3. Calculate Tax impact = Tax on gain or tax benefit from loss 4. Compute ATCF = Selling price - Tax impact