Engineering Economic Analysis 11-57: A $150,000 asset has been depreciated with

Question

Engineering Economic Analysis

11-57: A $150,000 asset has been depreciated with the straight-line method over an 8 year life. The estimated salvage value was $30,000. At the end of the 5th year the asset was sold for $90,000. From the tax perspective, what is happening at the time of disposal and what is the dollar amount? Suggestion: You need to know the market value and the book value (via straight-line) at the time of disposal. Then find the depreciation recapture and discuss its tax consequences. Answer: <10 pts> Reasoning/Work:

Explanation / Answer

Note that initial cost was $150,000 and salvage value is $30,000 so that depreciation to be levied each year under straight line method is (150,000 - 30,000)/8 = $15,000. At the end of 5th year, accumulated depreciation is $75000 and so book value is $150,000 - $75,000 = $75,000

Now salvage value is $90,000 so there will be capital gains of $90,000 - $75,000 = $15,000 when the asset is sold. Marginal tax rate will now be applicable on $15,000 and the same will be charged by the government. The remaining value will be added in the 5th year's cash flow.

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