Question

XYZ, Inc. purchased a new fixed asset that cost them $680,000 and the Accounting Department has indicated that it will use the straight-line method of depreciation with a useful life of 9-years and no planned salvage value. This new fixed asset will be utilized in a 5-year project. When this project is completed, this asset will be able to be sold for $159,000. The appropriate tax rate is 24 percent. Calculate the appropriate amount for the aftertax cash flow from the sale of this asset?

Answer 1

The asset has a useful life of 9 years and we want to find the book value of the asset after 5 years. The depreciation each year will be

Annual depreciation = $680,000 / 9

Annual depreciation = $75,555.56

Accumulated depreciation = 5 * $75,555.56

Accumulated depreciation = $377,777.78

Book value at the end of Year 5 = $680,000 - $377,777.78 = $302,222.22

Aftertax salvage value = $159,000 + ($302,222.22  - $159,000)(0.24)

Aftertax salvage value = $193,373