You purchased a machine for $1.19 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 40%. If you sell the machine today (after three years of depreciation) for $724,000, what is your incremental cash flow from selling the machine?

The incremental cash flow is $706,400

Explanation:

Calculation of Depreciation for 3 years

Depreciation = Cost / Useful years

= $1,190,000/7

= $170,000

Depreciation up to 3 years = $170,000 * 3

= $510,000

Calculation of Book value

Book value = Cost - Deprciation up to 3 years

= $1,190,000-$510,000

= $680,000

Profit on sale of assets = Sales value - Book value

= $724,000 - $680,000

= $44,000

Incremental Cash flow = Sales value - (Profit on sales of asset * Tax rate)

= $724,000 - $44,000 * 40%

= $724,000 - $17,600

= $706,400

Therefore, the incremental cash flow is $706,400

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