Question

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $4,650,000 and will be sold for $1,325,000 at the end of the project. If the tax rate is 22 percent, what is the aftertax salvage value of the asset

Answer 1

Answer:

After tax salvage value of the asset = $1210274

Explanation:

Given book value of purchase = $4650000

Accumulated depreciation  $=4650000* ( 0.2 + 0.32 + 0.192 + 0.1152) = 3846480$

Book value at the time of sale = book value of purchase - Accumulated depreciation

Book value at the time of sale = $4650000 - $3846480 = $803520

Gain on disposal = salvage value of plant - Book value at the time of sale

Gain on disposal = $1325000 - $803520

Gain on disposal = $521480

Tax on gain on disposal = 521480 * 22% = $114725.60

After tax cash flow = 1325000 – 114725.60 = $1210274