Question

Bricktops Inc. purchased a piece of equipment for $45,000,000 for a project that is expected to last 8 years. Equipment will be depreciated using 10 year straight line depreciation. At the end of year 8, the company can sell the equipment for $10,000,000. The tax rate is 30%. What is the approximate after-tax salvage value of this equipment?

Answer 1

The after tax salvage value is computed as shown below:

= Sales value - tax expenses

Book value at the end of 8 years is computed as follows:

= Purchase price - (Purchase price / 10 years) x 8 years

= $ 45,000,000 - ($ 45,000,000 / 10) x 8

= $ 45,000,000 - $ 36,000,000

= $ 9,000,000

So, profit on sales is computed as follows:

= Sales value - book value

= $ 10,000,000 - $ 9,000,000

= $ 1,000,000

So, the after tax sales value will be as follows:

= Sales value - Profit on sales x tax rate

= $ 10,000,000 - $ 1,000,000 x 30%

= $ 9,700,000

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