Question

Karsted Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 100% has been depreciated. Karsted can sell the used equipment today for $8 million, and its tax rate is 20%. What is the equipment's after-tax salvage value? Write out your answer completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar.

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Answer 1

Solution :

Statement showing calculation of After Tax salvage value of the Equipment:

Sl.No.	Particulars	Amount
1.	Sale value of the Equipment	$ 8,000,000
2.	Less : Book value of the Equipment ( Since the Equipment has been depreciated a 100 %, Book value is equal to zero )	$ 0
3.	Profit on sale of Equipment = (1) – (2)	$ 8,000,000
4.	Tax Rate	20 %
5.	Tax payable on profit on sale of Equipment = ( $ 8,000,000 * 0.20 ) = (3) * (4)	$ 1,600,000
6.	After Tax salvage value = Sale value of Equipment - Tax payable on profit on sale of Equipment = $ 8,000,000 - $ 1,600,000 = (1) - (5 )	$ 6,400,000

Thus the After tax salvage value of the Equipment is = $ 6,400,000