An asset used in a 4-year project falls in the 5-year MACRS class for tax purpos

Question

An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $500,000 and will be sold for $100,000 at the end of the project. Assume tax rate is 35%. (A) Find the asset’s book value at the time of liquidation. (B) Find the amount of capital gain realized from the asset’s liquidation. (C) What is the tax implication of the asset’s liquidation? (D) What is the net salvage value of the asset? [Depreciation schedule for assets with 5-year tax life is: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76% in year 1 through year 6, respectively]

Explanation / Answer

Answer:

(A) Asset’s book value at the time of liquidation = Cost – Depreciation till liquidation

=500000 –(500000*(20%+ 32%+19.2%+ 11.52%)

=500000 -413600

=$86400

(B) Calculation of amount of capital gain realized from the asset’s liquidation:

Capital Gain = Sale value at the time of liquidation - Book value at the time of liquidation

=100000 -86400

=$13600

(C) Tax on Capital Gain = 13600*35% = $4760

(D) Net Salvage value = Sale value – Tax on capital gain

=100000 -4760 = $95240

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