An asset used in a four-year project falls in the five-year MACRS class for tax

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 $6,000,000 and will be sold for $1,200,000 at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

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 $6,000,000 and will be sold for $1,200,000 at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Explanation / Answer

Using MACRS depreciation, 5 year class, the total depreciation allowed through 4 years will be 82.72% of cost, leaving 17.28% as the Net Book Value when the project is completed, or 1036800.

If proceeds from its sale are 1,200,000, then book gain will be 163200 and tax at 34% will be 55488. So net proceeds from the sale will be 1,200,000, less tax of 55488, leaving a net after tax value of 1144512.

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