Question

Consider an asset that costs $352,000 and is depreciated straight-line to zero over its 7-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 $44,000. If the relevant tax rate is 23 percent, what is the aftertax cash flow from the sale of this asset? Multiple Choice $72,006.00 $65,148.28 $68,577.14 $33,880.00 $297,012.00

Answer 1

Answer:
Cost of Asset = $352,000
Residual Value = $0
Useful Life = 7 years
Depreciation per year = (Cost – Residual Value) / Useful Life
Depreciation per year = ($352,000 - $0) / 7
Depreciation per year = $50,285.71

Accumulated Depreciation at the end of 4 years = $50,285.71 * 4
Accumulated Depreciation at the end of 4 years = $201,142.84

Book Value at the end of Year 4 = $352,000 - $201,142.84
Book Value at the end of Year 4 = $150,857.16

After Tax Cash flow from the sale of Asset = Salvage Value – Tax Rate * (Salvage Value – Book Value)
After Tax Cash flow from the sale of Asset = $44,000 – 0.23 * ($44,000 - $150,857.16)
After Tax Cash flow from the sale of Asset = $44,000 – 0.23 * -$106,857.16
After Tax Cash flow from the sale of Asset = $68,577.14