. For a new project, Indigo Ink Inc. had planned on depreciating new machinery that costs $300 million on a 4-year, straight-line basis. Suppose now, that Armstead decides to depreciate the new machinery on an accelerated basis according to the following depreciation schedule: MACRS Depreciation Rates 20% 32 Year 2 19

The question requires us the to calculate after-tax cash flow to be generated from the sale of the machinery after it's useful life comes to an end. The after-tax cash flows refer to the cash received after the machinery has been sold (i.e sales proceeds).

Assuming that the MACRS depreciation rates are Year 1-20% Year 2-32% Year 3-19% Year 4-12% Year 5-11% Year 6-12%. Tax rate is 40%.

First of all we need to find the book value of machinery (i.e cost minus accumulated depreciation) and subtract it from sale proceeds to calculate cash flows. Then we calculate tax on cash flows and compare it with cash flows (sales proceeds) to get after-tax cash flows.

The useful life of the machinery is six years but for the project that it has been purchased for ends in four years time and machinery is sold at $60m. so depreciation from years 5 & 6 are left. We have to add depreciation percentages together and multiply them with the cost of machinery to get accumulated depreciation.

Acc depreciation = $300m×23%(11%+12%)

Acc dep =$69m

Then we calculate cash flows as follows;

Cash flows = $69m - $60m

Cash flows =$9m

Tax on cash flows = $9m×40%

Tax on cash flows =$3.6m

After tax cash flows = $60m - $3.6m

After tax cash flows = $56.4m