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 $6,020,000 and will be sold for $1,220,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset?

1

(Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Show your work!

Year Three-Year Five-Year Seven-Year

1

33.33% 20% 14.29% 2 44.45 32 24.49 3 14.81 19.2 17.49 4 7.41 11.52 12.49 5 11.52 8.93 6 5.76 8.92 7 8.93 8 4.46

Explanation / Answer

Using MACRS depreciation, 5 year class, the total depreciation allowed through 4 years will be

= 20 + 32 + 19.2 + 11.52

= 82.72% of cost, leaving 17.28% as the Net Book Value when the project is completed.

So, value left = 17.28 x 6020000 / 100 = $1040256

Book Gain = 1220000 - 1040256 = $179744

At 35% tax = 0.35 x 179744 = $62910.4

Subtracting this tax from sales proceeds = 1220000 - 62910.4 = $1157089.6

This is the after tax salvage value

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