Question

# Consider an asset that costs \$404,800 and is depreciated straight-line to zero over its 6-year tax...

 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?

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