Question

Net Salvage Value

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $9.6 million, of which 80% has been depreciated. The used equipment can be sold today for $3.2 million, and its tax rate is 25%. What is the equipment's after-tax net salvage value? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

Answer 1

Given about Allen Air Lines,

Cost of equipment = $9.6 million

equipment is depreciated up to 80%

So, remaining book value of the equipment = equipment cost*(1 - depreciation)

=> Book value = 9.6*(1-0.8) = $1.92 million

Equipment is sold for $3.2 million

So, profit earned = selling price - book value = 3.2 - 1.92 = $1.28 million

Tax rate = 25%

So, tax paid on profit = 25% of 1.28 = $0.32

So, after-tax net salvage value of the equipment = selling price - tax paid = 3.2 - 0.32 = $2.88 million