Question

Consider an asset that costs $211,200 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $26,400.

If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

$257,412.00

$41,302.80

$39,336.00

$37,369.20

$17,160.00

Answer 1

annual depreciation = 211200/10 = 21120

asset is used for 7 years so depreciation for 7 years = 21120 x 7 =147840

therefore book value = 211200 - 147840 = 63360

now salvage value is 26400

as book value is greater than salvage value, there is a capital loss

tax saving on capital loss = 35% (book value - salvage value) = 35% (63360 - 26400) = 12936

this will be termed as cash inflow

so after tax cash flow from sale of assets = salvage value + tax saving on capital loss on sale

After tax cash flow from sale of assets = 26400 + 12936 = 39336

ANSWER : $39336