4. value: 11.11 points Consider an asset that costs $639,000 and is depreciated

Question

4.

value:
11.11 points

Consider an asset that costs $639,000 and is depreciated straight-line to zero over its nine-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $166,000. If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset?

Consider an asset that costs $639,000 and is depreciated straight-line to zero over its nine-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $166,000. If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset?

Explanation / Answer

Hi,

Book Value of the Asset = Cost - Depreciation for 5 Years = 639000 - 639000/9*5 = 284000

Loss on Sale of Asset = Sales Value - Book Value = 166000 - 284000 = -118000 (will result in tax saving)

After Tax Salvage Value = Sales Value + Tax Savings = 166000 + 30%*118000 = $201400

Answer is $201400

Thanks.

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