Question

# Consider an asset that costs \$705,000 and is depreciated straight-line to zero over its eight-year tax...

 Consider an asset that costs \$705,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for \$153,000. If the relevant tax rate is 24 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)

After tax salvage value ?

Depreciation per year as per straight line method

= (Purchase cost – Salvage value) / Useful life

= (\$705,000 – 0) / 8

= \$ 88,125 per year

So, accumulated depreciation at the end of the 5 year project

= Depreciation per year x Number of years

= \$ 88,125 x 5

= \$ 440,625

So, Book value at the end of 5 years

= Purchase cost – Accumulated depreciation

= \$705,000 - \$ 440,625

= \$ 264,375

Loss of sale of asset for \$153,000

= Book value – Sale value

= \$ 264,375 - \$153,000

= \$ 111,375

Tax saving on loss

= Loss x Tax Rate

= \$ 111,375 x 24%

= \$ 26,730

So, after tax salvage value

= Sale value + Tax Saving on loss

= \$153,000 + \$ 26.730

= \$ 179,730

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