I know the answer to this question should be 6,520,000. Could someone show me ho

Question

I know the answer to this question should be 6,520,000. Could someone show me how to get this answer because I have another similar problem.   I recently had help from two other tutors and they cannot seem to find out how it was calculated. This is an advanced college course.

Your company has just agreed to sell one of its factories for 8,200,000. You built the factory for 5,000,000 2 years ago. You have been depreciating the factory straight line over its useful life of 10 years. If the tax rate is 40%, what will your cash flow on the sale of the factory be? (please round to the nearest dollar and please do not include commas in your answer)

Explanation / Answer

According to Straight line method,

Depreciation per annum = (Cost of the asset – Residual value)/Life time of the asset

Here Cost of the factory = $5000000, Life time = 10 years and

Since there is no residual value given for the factory,

Depreciation per annum    = ($5000000 – 0)/10 = $500000

Current book value of the factory = $5000000 - $500000*2 = $4000000

Profit on sale of factory = $8200000 - $4000000 = $4200000

Profit after tax = $4200000 x (1 - 0.40) = $2520000

Cash flow after tax = Profit after tax + Depreciation (for 2 years)

                              = $2520000 + $1000000 = $3520000

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