Question

Consider an asset that costs $220,000 and is depreciated straight-line to zero over its 5-year tax life. The asset is to be used in a 3-year project; at the end of the project, the asset can be sold for $27,500.

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.)

Answer 1

The asset has a useful life of 5 years and we want to find the book value of the asset after 3 years. With straight-line depreciation, the depreciation each year will be:

Annual depreciation = $220,000 / 5

Annual depreciation = $44,000

Accumulated depreciation = 3 * $44,000

Accumulated depreciation = $132,000

Book value at the end of Year 3 = $220,000 - $132,000 = $88,000

Aftertax salvage value = $27,500 + ($88,000 - $27,500)(0.32)

Aftertax salvage value = $46,860