Question

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 ?

Answer 1

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