Question

# Consider an asset that costs \$193,600 and is depreciated straight-line to zero over its 9-year tax...

Consider an asset that costs \$193,600 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for \$24,200.

 Required : If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

 The asset has an nine-year useful life and we want to find the BV of the asset after five years. With straight-line depreciation, the depreciation each year will be:
 Annual depreciation = \$193600/9 Annual depreciation = \$21511.11
 So, after five years, the accumulated depreciation will be:
 Accumulated depreciation = 5(\$21511.11) Accumulated depreciation = \$107,555.55
 The book value at the end of Year 5 is thus:
 BV5 = \$193600 − 107,555.55 BV5 = \$86,044.45
 The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured.
 Aftertax salvage value = \$24,200+ (\$86,044.45− 24,200)(0.34) Aftertax salvage value = \$45227.113
 To find the taxes on salvage value, remember to use the equation:
 Taxes on salvage value = (BV − MV)T

This equation will always give the correct sign for a tax inflow (refund) or outflow (payment).

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