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Moore Co is considering acquiring a new machine for $105,000. The machine is estimated to have a 10-year life and scrap value of $5,000. Over its life the machine is expected to produce 2,000 units each year with a sales price per unit of $500 and combined material and labour costs of $450 per unit. Tax-allowable depreciation is available on a straight-line basis on cost over five years. Moore has a 40% tax rate and tax is paid in the year of returns.
What is the after-tax cash flow for the tenth year of the project?
A.$81,000
B.$68,400
C.$63,000
D.$60,000
ans is c
how is there a balancing charge
if 20000 is dep for 5 years then its twdv will be 5000(105000-100000) in year 10
but how is it 0???According to the question the TAD is based on cost (which is the case in real life as explained in our lectures) and is therefore 10,500 per year. So the tax written down value after 10 years is zero. It is sold for 5,000 and therefore there is a balancing charge of 5,000 giving rise (after tax) to a cash inflow of 3,000.
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