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You purchased a machine for $1 million three years ago and have been applying straight-line depreciation to

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You purchased a machine for $1 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 35%. If you sell the machine right now (after three years of depreciation) for $700,000, what is your incremental cash flow from selling the machine?

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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0132148238

2nd edition

Authors: Berk, DeMarzo, Harford

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In accounting terms, depreciation is defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. An example of fixed assets are buildings, furniture, office equipment, machinery, etc. The land is the only exception that cannot be depreciated as the value of land appreciates with time. Depreciation allows a portion of the cost of a fixed asset to be the revenue generated by the fixed asset. This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. This helps in getting a complete picture of the revenue

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