Question

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $13,860,000 and will be sold for $3,080,000 at the end of the project.

  

Required:

If the tax rate is 35 percent, what is the aftertax salvage value of the asset?

  
rev: 09_18_2012

$2,840,253

$2,002,000

$3,319,747

$2,982,265

$2,698,240

Answer 1

A. $2,840,253

To find the BV at the end of four years, we need to find the accumulated depreciation for the first four years. Add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost. Doing so, we get:

BV₄ = $13,860,000 - $13,860,000(0.2000 + 0.3200 + 0.1920 + 0.1152) = $2,395,008

The asset is sold at a gain to book value, so this gain is taxable.

Aftertax salvage value = $3,080,000 + ($2,395,008 − $3,080,000)(0.35) = $2,840,253