Question

Consider an asset that costs $712,000 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 $184,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)

Aftertax salvage value $

Answer 1

The asset has an eight-year useful life and we want to find the BV of the asset after five years. With straight-line depreciation, the depreciation each year will be:

Annual depreciation = $712,000/8

Annual depreciation = $89,000

So, after five years, the accumulated depreciation will be:

Accumulated depreciation = 5($89,000)

Accumulated depreciation = $445,000

The book value at the end of Year 5 is thus:

BV₅ = $712,000 − 445,000

BV₅ = $267,000

The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured.

Aftertax salvage value = $184,000 + ($267,000 − 184,000)(0.35)

Aftertax salvage value = $213,050