Question

34) At the start of a project, a firm assumed that a machine would be sold at the end of the project at $12 million. The firm used straight line depreciation method based on the book value of $12 million at the end of the project for the machine. However, at the end of the project, the machine is sold for $7 million instead. if the marginal tax rate is 30%, then the firm will

A) pay additional taxes of $3.60 million, since the taxes were underpaid

B) receive $2.1 million from the IRS since the taxes were overpaid

C) have $5 million in after tax proceeds from the sale of the machine

D) pay additional taxes of $2.1 million since the taxes were underpaid

E) have $8.50 million in after tax proceeds from the sale of the machine

Answer 1

Loss on sale of machine =sale value- book value

                7 - 12

                 -5

Tax savig due to loss = -5 *.30 = -1.5

After tax sale proceeds = 7- (-1.5)

           7 +1.5

             8.5 million

correct option is "E" - have $8.50 million in after tax proceeds from the sale of the machine