An asset used in a four-year project falls in the five-year MACRS class (MACRS T

Question

An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $7,700,000 and will be sold for $1,810,000 at the end of the project.

If the tax rate is 30 percent, what is the aftertax salvage value of the asset? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Aftertax salvage value = $_________

Property Class 5-Year Year 3-Year 7-Year 2 3 4 5 6 33.33% 44.45 14.81 7.41 20.00% 32.00 19.20 11.52 11.52 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 5.76 8

Explanation / Answer

Accumulated depreciation for the four years:

Add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. Next subtract this from the asset cost.

Book Value after 4 years = $7,700,000 – 7,700,000(.2000 + .3200 + .1920 + .1152)

BV4= $1,330,560

The asset is sold at gain to the book value (BV), hence gain is taxable.

Aftertax salvage value = $1,810,000 + ($1,330,560 – 1,810,000)(.30)

Aftertax salvage value = $1,666,168.

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