Question

Wertheim Industries has purchased industrial equipment for a new project, at a value of $4.25 million. The external accountants have advised the CFO to use the 7 yr class table in MACRS to depreciate the equipment. The CFO is conducting some simulations regarding the tax impact if the equipment is sold at varying dates during the project's life. The applicable tax rate is 21%. One simulation involves sale of the equipment for $1.5 million at the end of year 5; the other calls for sale of the equipment at the end of year 6 for $375,000. The BV at the end of year 5 is $ and the NSCF is $ The BV at the end of year 6 is $ and the NSCF is $ Use the table below. ALL ANSWERS WITH COMMAS AND ROUNDED TO TWO DECIMAL PLACES, 7-year Year 14.29% 1 24.49% 2 17.49% 3 12.49% 4 8.93% 5 8.92% 6 8.93% 7 4.46% 8

Answer 1

First we calculate the depreciation for full 7years period and along with book value at each period ended :-

Purchase price of asset = $4,250,000

years	MACR's rates	Depreciation for year(Purchase price * MACRs)	Book value at end of the year
1	14.29%	$607,325.00	$3,642,675.00
2	24.49%	$1,040,825.00	$2,601,850.00
3	17.49%	$743,325.00	$1,858,525.00
4	12.49%	$530,825.00	$1,327,700.00
5	8.93%	$379,525.00	$948,175.00
6	8.92%	$379,100.00	$569,075.00
7	8.93%	$379,525.00	$189,550.00

Calculate the book value and NSCF at end of year 5 :-

Book value at end of years (BV) =$ 948,175.00

NSCF:-

Sale value	1,500,000.00
Less- Book value	948,175.00
Gain on sale	551,825.00
tax@21% on gain	115,883.25
NSCF (sale value - tax)	1,384,116.75

NSCF if assets sold at end of year 5 = $1,384,116.75

Calculate the book value and NSCF at end of year 6 :-

Book value at end of years (BV) =$ 569,075.00

NSCF:-

Sale value	375,000.00
Less- Book value	$569,075.00
Gain / (loss) on sale	(194,075.00)
tax/(tax shield) @21% on gain	(40,755.75)
NSCF (sale value - tax)	415,755.75

NSCF if assets sold at end of year 6 = $415,755.75