To find the expected after-tax cash flow from selling the equipment, we need to calculate the after-tax proceeds from the sale. This will involve determining the book value of the equipment at the time of sale, calculating any gain or loss on the sale, and applying the tax rate accordingly.

Step 1: Calculate Annual Depreciation

Since the equipment is depreciated over 11 years to a book value of $62,000, we calculate the annual depreciation.

$\text{Annual Depreciation} = \frac{\text{Purchase Price} - \text{Residual Value}}{\text{Depreciation Period}}$

$\text{Annual Depreciation} = \frac{414,000 - 62,000}{11} = \frac{352,000}{11} \approx 32,000$

Step 2: Calculate Book Value at Time of Sale (14 years later)

The equipment is depreciated for 11 years, after which its book value is $62,000. Since the equipment is sold in 14 years (3 years after the depreciation period ends), the book value remains at $62,000.

Step 3: Calculate Gain or Loss on the Sale

The sale price is $85,000, and the book value at the time of sale is $62,000. The gain on the sale is the difference between these two values.

$\text{Gain on Sale} = \text{Sale Price} - \text{Book Value}$

$\text{Gain on Sale} = 85,000 - 62,000 = 23,000$

Step 4: Calculate Tax on the Gain

The tax on the gain is calculated by multiplying the gain by the tax rate (35%).

$\text{Tax on Gain} = \text{Gain on Sale} \times \text{Tax Rate}$

$\text{Tax on Gain} = 23,000 \times 0.35 = 8,050$

Step 5: Calculate After-Tax Cash Flow from the Sale

The after-tax cash flow from the sale is the sale price minus the tax on the gain.

$\text{After-Tax Cash Flow} = \text{Sale Price} - \text{Tax on Gain}$

$\text{After-Tax Cash Flow} = 85,000 - 8,050 = 76,950$

Final Answer:

The expected after-tax cash flow from selling the equipment is $76,950.

Would you like further details or have any questions?

1. How would the answer change if the tax rate were different?
2. What impact does straight-line depreciation have on the after-tax cash flow?
3. How does selling the equipment before fully depreciating it affect the cash flow?
4. What if the equipment was sold at a loss instead of a gain?
5. How would accelerated depreciation methods affect the book value and gain?

Tip: Remember, tax implications are essential in calculating after-tax cash flows from asset sales; gains are taxed, while losses can often offset taxes.