Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost $40 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $18 million. The firm’s tax rate is 35%. What is the after-tax cash flow from the sale of the equipment?

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oeerivona oeerivona · Answer 1 · 2021-11-27T11:31:43+01:00

The company's after-tax cash flow is a measure of the company's cash

generation ability.

Reasons:

The given parameter are;

Original cost of the equipment = $40 million

The type of depreciation = Straight line depreciation

Number of years of depreciation = 5 years

Current price at which it can be sold = $18 million

The tax rate of the firm = 35%

Required:

The after-tax cash flow from the sale of the equipment.

Solution:

The Cash Flow After Tax, CFAT, is given as follows;

CFAT = Net income + Amortization + Depreciation + Other non-Cash Cash Charges

The annual depreciation is given as follows;

[tex]Annual \ depreciation = \dfrac{\$40 \ million - \$18 \ million}{5 \ years} = \$4.4 \ million \ per \ year[/tex]

Selling the equipment gives;

The Earnings Before Tax (EBT) = $18 million

The Net Income = Income - Tax = $18 million - (35% × $18 million)

The Net Income = $11.7 million

Cash Flow After Tax CFAT = Net income + Depreciation

∴ CFAT = $11.7 million + $4.4 million = $16.1 million

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