Question 5 20 pts TVM Consulting bought new building for its headquarters in the
ID: 2562442 • Letter: Q
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Question 5 20 pts TVM Consulting bought new building for its headquarters in the year 2000. The purchase cost was 721890 dollars and in addition it had to spend 91571 dollars adapting the space for its services. The building has been in use since June 21st, 2000. TVM Consulting forecasted that in 2030 the building would have a net salvage value of $1,000,000. Using the US Straight Line Depreciation Schedule, estimate the Net Cash Flow from Salvage Value if TVM consulting decides to sell the building on April 15th 2004 for $1291016, and that the prevailing tax rate for capital gains is 34%. (note: round your answer to the nearest cent and do not include spaces, currency signs, or commas)Explanation / Answer
Cost of building = Purchase cost + Installation charge = $721,890 + $91,571 = $813,461
Expected life years = Year 2000 to year 2030 is a gap of 30 years.
Depreciation per year (straight-line method) = (Cost – Salvage value) / Expected life years
= ($813,461 - $1,000,000) / 30
= - 6,217.97
Number of days (21st June, 2000 to 15th April, 2004) = 194 + 365 + 365 + 365 + 106 = 1,395
Depreciation up to 15th April, 2004 = (- 6,217.97) × (1,395 / 365) = - 23,764.57
Value of building not covered = Cost – Depreciation up to 15th April 2004
= 813,461 – (-23,764.57)
= 813,461 + 23,764.57
= 837,225.57
Amount of tax = (Salvage value – Value of building not covered) × 0.34
= (1,291,016 – 837,225.57) × 0.34
= $154,288.75
NCF from salvage = Salvage value – Amount of tax
= 1,291,016 – 154,288.75
= 1136727.25 (Answer)
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