Question

Sengupta Inc. just purchased some equipment which has a depreciable life of 7 years. The equipment...

Sengupta Inc. just purchased some equipment which has a depreciable life of 7 years. The equipment cost \$1,720,000 and will be used in a project with a 4 year lifespan. At the end of the project, the equipment will be sold for market value of \$450,000 at the end of year 5. The equipment will be depreciated using the straight-line method. Assume the firm has a 30% marginal tax rate and the equipment will be used in a project that last 5 years. Calculate the after tax salvage value. (Round to 2 decimals)

Solution:

Cost of equipment = \$1,720,000

Depreciable life = 7 years

Annual depreciation - DLM = \$1,720,000 /7 = \$245,714.29

Accumulated depreciation for 5 years = \$245714.29*5 = \$12,28,571.42

Book value of equipment after 5 years = \$1,720,000 - \$1,228,571.42 = \$491,428.58

Market value after 5 years = \$450,000

Gain (Loss) on sale of equipment = \$450,000 - \$491,428.58 = (\$41,428.58)

Tax saving on loss = \$41,428.58 * 30% = \$12,428.57

After tax salvage value = \$450,000 + \$12428.57 = \$462,428.57