Question

Depreciable fixed assets of $2 million are to be used in a 5-year project. Your accountant uses straight-line depreciation to a terminal book value of $250,000 when the project ends in 5 years. The actual market value of the fixed assets when the project ends is only $150,000. If your tax rate is 35%, what is the after-tax cash flow from the salvage value of these fixed assets?

Answer 1

Fixed Assets Value = $2,000,000

Terminal book value at end of year 5 = $250,000

Tax rate = 35%

Market Value at end of year 5 = $150,000

Profit / (Loss) on sale of assets at end of year 5 = $150,000-$250,000 = -$100,000

Tax benefit on loss on sale = $100,000*35% = $35,000

After tax cash flow from the salvage value = Market Value + Tax benefit on loss on sale = $150,000+$35,000 = $185,000

(Since there is a loss on sale of asset, the resulting tax benefit is a cash-inflow and hence added to the sale value (market value) of the asset).