Question

Consider an asset that costs $404,800 and is depreciated straight-line to zero over its 6-year tax life. The asset is to be used in a 3-year project; at the end of the project, the asset can be sold for $50,600.

  

If the relevant tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset?

Answer 1

Cost of an Asset = $404,800

Annual Depreciation = [Cost - Salvage] / useful life = [$404,800 - $0] / 6

Annual Depreciation = $67,466.67

So, after three years the accumulated depreciation will be:

Accumulated Depreciation = $67,466.67 * 3 = $202,400

Accumulated Depreciation = $202,400

Book value at end of year 3 = $404,800 - $202,400

Book value at end of year 3 = $202,400

The sale value is lee then the Book value of asset. The depreciation tax shield of the loss is recaptured.

Sale value + [(Book value - Sale value) * 0.21]

= $50,600 + [($202,400 - $50,600) * 21%]

= $50,600 + $31,878

= $82,478

So, After tax cash flow from the sale of this asset = $82,478