Question

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $11,160,000 and will be sold for $2,480,000 at the end of the project.

  

Required:

If the tax rate is 33 percent, what is the aftertax salvage value of the asset?

  

Answer 1

Firstly we will find the accumulated depreciation for the first four years by adding the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset.

Accumulated depreciation = $11,160,000(0.2000 + 0.3200 + 0.1920 + 0.1152) = $9,231,552

BV at the end of four years = $11,160,000 - $9,231,552 = $1,928,448

Aftertax salvage value = $2,480,000 + ($1,928,448 − $2,480,000)(0.33)

Aftertax salvage value = $2,297,988