Question

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $25 million, of which 85% has been depreciated. The used equipment can be sold today for $6.25 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Answer 1

Given that,

Allen Air Lines must liquidate some equipment that is being replaced.

Original cost of equipment C = $25 million

depreciated value = 85%

So, Current book value = C*(1-depreciated value) = 25*(1-0.85) = $3.75 million

Equipment is sold for $6.25 million today,

So, company registered a profit of selling price - Book value = 6.25 - 3.75 = $2.5 million

tax rate T = 30%

So, tax on profit = T*profit = 0.30 * 2.5 = $0.75 million

So, equipment's after-tax net salvage value = selling price - tax = 6.25 - 0.75 = $5.5 million or $5500000