Question 10.2: The Staple Supply Co. has just purchased a new computerized ...
The Staple Supply Co. has just purchased a new computerized information system with an installed cost of $160,000. The computer is treated as five-year property. What are the yearly depreciation allowances? Based on historical experience, we think that the system will be worth only $10,000 when Staple gets rid of it in four years. What are the tax consequences of the sale? What is the total aftertax cash flow from the sale?
The yearly depreciation allowances are calculated by just multiplying $160,000 by the five year percentages found in Table 10.7:
TABLE 10.7 Modified ACRS Depreciation Allowances
| Property Class |
| Year 3-Year 5-Year 7-Year |
| 1 33.33% 20.00% 14.29%
2 44.44 32.00 24.49 3 14.82 19.20 17.49 4 7.41 11.52 12.49 5 11.52 8.93 6 5.76 8.93 7 8.93 8 4.45 |
| Year | MACRS Percentage | Depreciation | Ending Book Value | |
| 1 | 20.00% | .2000 \times \$160,000 = \$ 32,000 | $ 128,000 | |
| 2 | 32.00 | .3200 \times 160,000 = 51,200 | 76,800 | |
| 3 | 19.20 | .1920 \times 160,000 = 30,720 | 46,080 | |
| 4 | 11.52 | .1152 \times 160,000 = 18,432 | 27,648 | |
| 5 | 11.52 | .1152 \times 160,000 = 18,432 | 9,216 | |
| 6 | \underline{5.76} | .0576 \times 160,000 = \underline{9,216} | 0 | |
| \underline{\underline{100.00}}% | $\underline{\underline{160.000}}% | |||
Notice that we have also computed the book value of the system as of the end of each year.
The book value at the end of Year 4 is $27,648. If Staple sells the system for $10,000 at that time, it will have a loss of $17,648 (the difference) for tax purposes. This loss, of course, is like depreciation because it isn’t a cash expense.
What really happens? Two things. First, Staple gets $10,000 from the buyer. Second, it saves .34 × $17,648 = $6,000 in taxes. So the total aftertax cash flow from the sale is a $16,000 cash inflow.