Question

Pera Inc. is planning to buy a piece of equipment that can be used in a 8-year project. The equipment costs $4,000,000; has a tax life of 20 years, and is depreciated using the straight-line method. The equipment can be sold at the end of 8 years for $500,000. If the marginal tax rate is 20 percent, what is the after-tax cash flow from the sale of this asset (termination value of the equipment)?

Answer 1

1. Calculation of Depreciation on Equipment

= Equipment Price / Life of the project

= 4000000 /20

= 200000

2. Calulation of Book value of Equipment after 8 Years

= Equipment value - Accumulated depreciation

= 4000000 - (200000 x 8)

= 2400000

3. Loss on sale of Equipment

= Sale price - Book value

= 500000 - 2400000

Loss = 1900000

4. Tax saving on loss on sale of equipment

= 1900000 x 0.20

= 380000

5.After Tax cash flow

= Sale proceed +Tax Benefit on Equipment

= 500000 + 380000

= 880000.