Question

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisiton cost of $8,300,000 and will be sold for $1,700,000 at the end of the project. If the tax rate is 35%, what is the after-tax salvage value?

Use the following table below:

Year ACRS %

   1 20.00%

   2 32.00%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

Answer 1

Ans :

Given,

Acquisiton Cost = $8,300,000

Salvage Value = $1,700,000

Tax Rate = 35 %

First we need to calculate Book Value at the end of four years -

Book Value = Acquisiton Cost - Accumulated Depreciation

= 8,300,000 - 8,300,000 (0.2000+0.3200+0.1920+0.1150)

= 8,300,000 - 8,300,000 * 0.827

= 8,300,000- 6,864,100

= 1,435,900

Afetr Tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * Tax rate

= 1,700,000- (1,700,000 - 1,435,900 ) * 0.35

= 1,700,000 - 92,435

Afetr Tax Salvage Value = $ 1,607,565