Question

Southern Co. purchases an asset for​ $50,000. This asset qualifies as a​ five-year recovery asset under​ MACRS, with the fixed depreciation percentages as​ follows: year 1​ = 20.00%; year 2​ = 32.00%; year 3​ = 19.20%; year 4​ = 11.52%. Southern has a tax rate of​ 20%. If the asset is sold at the end of four years for​ $5,000, what is the​ after-tax salvage​ value?

A. ​$4,000.00

B. ​$2,592.00

C. ​$6,274.00

D. ​$5,728.00

E. ​$3,535.36

Answer 1

Year 1 depreciation = 50,000 * 20% = 10,000

Year 2 depreciation = 50,000 * 32% = 16,000

Year 3 depreciation = 50,000 * 19.2% = 9,600

Year 4 depreciation = 50,000 * 11.52% = 5,760

Book value after 4 years = 50,000 - 10,000 - 16,000 - 9,600 - 5,760

Book value after 4 years = 8,640

After tax salvage value = Sale value - tax(sale value - book value)

After tax salvage value = 5,000 - 0.2(5,000 - 8,640)

After tax salvage value = 5,000 + 728

After tax salvage value = $5,728.00