A. Consider an asset that costs $264,000 and is depreciated straight-line to zer
ID: 2818910 • Letter: A
Question
A.
Consider an asset that costs $264,000 and is depreciated straight-line to zero over its 12-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $33,000.
If the relevant tax rate is 32 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)
rev: 09_18_2012
$634,932.00
$71,720.00
$68,134.00
$75,306.00
$22,440.00
B.
rev: 09_18_2012
$1,782,675
$1,876,500
$2,160,000
$1,970,325
$526,500
Consider an asset that costs $264,000 and is depreciated straight-line to zero over its 12-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $33,000.
Explanation / Answer
a.
Annual depreciation=(Cost-Salvage value)/Useful Life
=(264000/12)=$22000/year
Hence book value as on date of sale=Cost-Accumulated Depreciation
=$264000-(22000*5)=$154000.
Hence loss on sale=(154000-33000)=$121000
Hence after tax cash flow=Sale proceeds+(loss on sale*Tax rate)
=33000+(121000*0.32)
=71720.
b.
Annual depreciation=$4.05million/3
=$1,350,000
Hence OCF=(Sales-Costs)(1-tax rate)+Tax savings on annual depreciation
=(3,600,000-1,440,000)(1-0.35)+(0.35*1,350,000)
=$1,876,500
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