A company is evaluating a new 4-year project. The equipment necessary for the pr
ID: 2805843 • Letter: A
Question
A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,450,000 and can be sold for $710,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 40 percent. What is the after-tax salvage value of the equipment? Select one: a. $505,488 b. $710,000 c. $664,464 d. $755,536 e. $426,000
Explanation / Answer
Book value after 4 years = (100% - (20% + 32% + 19.2% + 11.52%))*3450000 = 596160
Tax on profit = 40%*(710000 - 596160) = 45536
After tax salvage value = 710000 - 45536 = 664464 (Option C)
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