Question 7.M: A $125,000 tractor-trailer is being depreciated by the SL me...

Engineering Economy [EXP-20136]

A $125,000 tractor-trailer is being depreciated by the SL method over five years to a final BV of zero. Half year convention does not apply to this asset. After three years, the rig is sold for (a) $70,000 or (b) $20,000. If the effective income tax rate is 40%, what is the net cash inflow from the sale for situation (a) and situation (b)? (7.8)

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$BV_{3}$ = $125,000 – (3)($125,000/5) = $50,000
(a) Gain on disposal = $70,000 − $50,000 = $20,000
Tax liability on gain = 0.4($20,000) = $8,000
Net cash inflow = $70,000 − $8,000 = $62,000

(b) Loss on disposal = $50,000 − $20,000 = $30,000
Tax credit from loss = 0.4($30,000) = $12,000
Net cash inflow = $30,000 + $12,000 = $42,000

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