Question

A firm purchased a piece of equipment for $200,000 exactly 8 years ago. At that time, the company decided to depreciate the equipment using straight-line depreciation over a 10 year period. Today, the firm can sell the equipment for $100,000, and the firm has a tax rate of 30%. If the firm sells the equipment today, what will be the NSV?

Answer #1

Purchase price of equipment = $200000

depreciation method is Straight line for 10 years

So, depreciation rate yearly = 100%/10 = 10%

depreciated value in 8 years = 8*10 = 80% of the purchase price.

So, book value of equipment today = 20% of 200000 = $40000

Equipment sold at $100000

So, profit on the sale of equipment is 100000 - 40000 = $60000

Tax rate = 30%. So, tax paid on profit = 30% of 60000 = $18000

So, net salvage value of equipment = Selling price - tax = 100000 - 18000 = $82000

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