Question

Yamba Limited purchased a machine for $10,000, to be depreciated using the straight-line method over 5 years. In Year 4, the machine was sold for $1,000. Assume a tax rate of 30%.

Calculate the after-tax salvage cash flow of the machine.

Answer 1

The after tax salvage value is computed as shown below:

= Sales value - Tax on sale of machine

Tax on sale is computed as follows:

= (Sales value - book value in year 4) x tax rate

Book value in year 4 is computed as follows:

= Purchase price - depreciation till year 4

= $ 10,000 - ($ 10,000 / 5) x 4

= $ 10,000 - $ 8,000

= $ 2,000

So, the tax on sale will be as follows:

= ($ 1,000 - $ 2,000) x 30%

= - $ 300

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

= $ 1,000 - (- $ 300)

= $ 1,000 + $ 300

= $ 1,300

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