Cost recovery. Richardses\' Tree Farm Inc. purchased a new aerial tree trimmer f

Question

Cost recovery. Richardses' Tree Farm Inc. purchased a new aerial tree trimmer for $91,000. It is classified in the property class category of a single-purpose agricultural and horticultural structure. Then the company sold the tree trimmer after four years of service. If a seven-year life and MACRS, EE, was used for the depreciation schedule, what is the after-tax cash flow from the sale of the trimmer (use a 40% tax rate) if a. the sales price was $35,000? b. the sales price was $28,428.40? c the sales price was $21,000? a. If the sales price is $35,000, what is the after-tax cash flow? S (Round to the nearest cent) b· lf the sales price is S28 ,428.40, what is the after-tax cash flow? (Round to the nearest cent.) c. If the sales price is $21,000, what is the after-tax cash flow? 47 (Round to the nearest cent) Enter your answer in each of the answer boxes 6

Explanation / Answer

As per 7 years MACRS depreciation, depreciation in 1st year = 0.1429, depreciation in 2nd year = 0.2449, depreciation in 3rd year = .1749 & depreciation in 4th year = 0.1249

So, accumulated depreciation after 4th year = 91000 * (0.1429 + 0.2449 + 0.1749 + 0.1249) = 62571.60

So, Book Value of trimmer after 4th year = 91000 - 62571.60 = 28428.40

a.

If sales price is 35000, then profit made = (35000 - 28428.40) = 6571.60

Tax on profit = 6571.60 * 40% = 2628.64

So, After tax cash flow = 35000 - 2628.64 = 32371.36

b.

If sales price is 28428.40, then profit made = (28428.40 - 28428.40) = 0

So, there will be no taxation

So, After tax cash flow = 28428.40

c.

If Sales Price = 21000, then loss on sales = (28428.40 - 21000) = 7428.40

Tax Credit on Loss = 7428.40 * 40% = 2971.36

So, After tax Cash flow = 21000 + 2971.36 = 23971.36

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