An asset used in a 4-year project falls in the 5-year MACRS class ( MACRS Table

Question

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $18,720,000 and will be sold for $4,160,000 at the end of the project.

If the tax rate is 34 percent, what is the aftertax salvage value of the asset?

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $18,720,000 and will be sold for $4,160,000 at the end of the project.

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $18,720,000 and will be sold for $4,160,000 at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset?

Explanation / Answer

Total depreciation % over 4 year period (as seen from MACRS table) = 20%+32%+19.2%+11.52% = 82.72%

So book value of asset after 4 years (when the project ends) = (1-82.72%)*18,720,000 = 3,234,816

Profit on sale of asset = sale value - book value = 4,160,000 - 3,234,816 = 925184

Tax on sale of asset = 925184*34% = 314562.6

So after tax salvage value = salvage value-tax = 4,160,000-314562.6 = $ 3,845,437.4

Hope this helped ! Let me know in case of any queries.

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