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 $7,300,000 and will be sold for $1,640,000 at the end of the project. If the tax rate is 35 percent, what is the after tax salvage value of the asset?
Depreciation for 5 year MACRS class is calculated in below table -
| Year | Depreciation rates | Depreciation |
| Year 1 | 20% | $14,60,000.00 |
| Year 2 | 32% | $23,36,000.00 |
| Year 3 | 19.20% | $14,01,600.00 |
| Year 4 | 11.52% | $8,40,960.00 |
Acquisition Cost - $7,300,000
Sale Price - $1,640,000
Accumulated Depreciation - $6,038,560
Book value after 4 years - $7,300,000 - $6,038,560 = $1,261,440
Tax Rate - 35%
Capital Gain - $1,640,000 - $1,261,440 = $378,560
After Tax Salvage Value = Sale Price - Tax Rate*Capital Gain
After Tax Salvage Value = $1,640,000 - 35%*$378,560 = $1,507,504
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