Question

Consider an asset that costs $519,200 and is depreciated straight-line to zero over its 13-year tax life. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $64,900.

Required : If the relevant tax rate is 32 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

a. $120,813.85

b. $44,132.00

c. $126,854.54

d. $1,082,544.00

e. $114,773.16

Answer 1

Cost of Asset = $519,200
Tax Life = 13 years

Annual Depreciation = Cost of Asset / Tax Life
Annual Depreciation = $519,200 / 13
Annual Depreciation = $39,938.46

Accumulated Depreciation for 7 years = 7 * Annual Depreciation
Accumulated Depreciation for 7 years = 7 * $39,938.46
Accumulated Depreciation for 7 years = $279,569.22

Book Value at the end of Year 7 = Cost of Asset - Accumulated Depreciation for 7 years
Book Value at the end of Year 7 = $519,200 - $279,569.22
Book Value at the end of Year 7 = $239,630.78

Salvage Value = $64,900

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax
After-tax Salvage Value = $64,900 - ($64,900 - $239,630.78) * 0.32
After-tax Salvage Value = $64,900 + $55,913.85
After-tax Salvage Value = $120,813.85

So, after-tax cash flow from the sale of asset is $120,813.85