2). Assume the equipment is classified as seven-year property under MACRS. What

Question

2). Assume the equipment is classified as seven-year property under MACRS. What is the depreciation expense in Year 4 for this equipment? What is the book value at the end of Year 5 for this equipment? 4. Consider an asset t tax life. The asset is to be used in a five-year project. If the relevant income tax rate is 40 percent, and the capital gains tax rate is 15 percent, what is the after-tax cash flow from the sale of this asset? 1) At the end of the project, the asset can be sold for $95,000. 2) At the end of the project, the asset can be sold for $120,000. 3) At the end of the project, the asset can be sold for $210,000 4) At the end of the project, the asset can be sold for $760,000. and is depreciated straight-line to zero over its six-year 5. An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $860,000 and will be sold at the end of the project. If the income tax rate is 35 percent, and the capital gains rate is 20 percent, what is the after-tax salvage value of the asset? 1) At the end of the project, the asset can be sold for $90,000. 2) At the end of the project, the asset can be sold for $148,608. 3) At the end of the project, the asset can be sold for $220,000. 4) At the end of the project, the asset can be sold for $ 920,000.

Explanation / Answer

Solving 4 questions as per rule

1) Sales 164000 Dep tax shield 5320 Costs 87000 Dep 15200 EBIT 61800 Tax @ 35% 21630 PAT 40170 OCF OCF OCF OCF Sales 164000 (Sales-Costs)*(1-t) 50050 Net income 40170 EBIT 61800 Cost 87000 Dep*t 5320 Dep 15200 Dep 15200 Taxes 21630 Tax 21630 OCF 55370 OCF 55370 OCF 55370 OCF 55370 2) Sales 62000 Dep tax shield 2170 Costs 48000 Dep 6200 EBIT 7800 Tax @ 34% 2652 PAT 5148 OCF OCF OCF OCF Sales 62000 (Sales-Costs)*(1-t) 9240 Net income 5148 EBIT 7800 Cost 48000 Dep*t 2108 Dep 6200 Dep 6200 Taxes 2652 Tax 2652 OCF 11348 OCF 11348 OCF 11348 OCF 11348 3) Dep expense Yr 4 122000 Book value at end Yr 5 244000 2) MACRS 7 Yr dep expense for yr 4 106664.6 Book value at end of Yr 5 190527.4 4) Book value at end of 5 yrs 120000 Asset sold Capital gain Loss After tax cash 95000 0 25000 105000 120000 0 0 120000 210000 90000 0 286500 760000 640000 0 1304000

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