Question

Consider an asset that costs $193,600 and is depreciated straight-line to zero over its 11-year tax life. The asset is to be used in a 4-year project; at the end of the project, the asset can be sold for $24,200. Required : If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

$57,860.00

$60,753.00

$15,972.00

$54,967.00

$493,208.00

Answer 1

A. $57,860.00

The asset has a useful life of 11 years and we want to find the book value of the asset after 4 years.With straight-line depreciation, the depreciation each year will be:

Annual depreciation = $193,600 / 11

Annual depreciation = $17,600

So, after four years, the accumulated depreciation will be:

Accumulated depreciation = 4($17,600)

Accumulated depreciation = $70,400

The book value at the end of Year 4 is thus:

BV₄ = $193,600 – $70,400

BV₄ = $123,200

The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured.

Aftertax salvage value = $24,200 + ($123,200 – $24,200)(.34)

Aftertax salvage value = $57,860