Question

CheckYourSalvage Inc. purchased a piece of equipment of $630,000 for a project that will last 5 years. The firm is going to depreciate this equipment using 7 year straight depreciation. At the end of year 5 it can sell the equipment for $220,000. What is the after-tax salvage value of this equipment if the tax rate is 40%?

Answer #1

Calculation of After tax salvage value of equipment -->

Purchase Price of Equipment = $630000

This is to be depreciated in 7 Years

Depreciation to be charged each year= $630000/7=90000

Note: $220000 is expected sale value not salvage value as salvage value is determined at the beginning of the period.Therefore $220000 is not taken as Salvage value while calculating depreciation.

Depreciation for 1st 5 years= 90000*5=450000

Book Value of Equipment at the enfd of 5 years=630000-450000=180000

Gain on Sale of Equipment=220000-180000=$40000

Tax on gain on sale=40000*40%=16000

**Therefore After Tax Salvage Value=Salvage Value-Tax on
gain on Sale**

**=220000-16000 = 204000**

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