Question

# Consider an asset that costs \$690,000 and is depreciated straight-line to zero over its eight-year tax...

Consider an asset that costs \$690,000 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 \$147,000. If the relevant tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)

Aftertax salvage value?

After-tax Salvage Value

Annual Depreciation expense using straight line method

Depreciation expense using straight line method = [Cost of the asset – Salvage Value] / 8 Years

= [\$690,000 - \$0] / 8 Years

= \$86,250 per year

Accumulated Depreciation for the 5 Years

Accumulated Depreciation Expense = Depreciation per year x 5 Years

= \$86,250 per year x 5 Years

= \$431,250

Book Value of the asset after Year 5

Book Value of the asset after Year 5 = Cost of the asset – Accumulated Depreciation

= \$690,000 - \$431,250

= \$258,750

Loss on sale of Equipment

Loss on sale of Equipment = Book Value of the asset – Sale Proceeds

= \$258,750 - \$147,000

= \$111,750

Here, the asset is sold at a loss of \$111,750, therefore, there would be a depreciation tax shield of the loss

The After-tax salvage Value

After-tax salvage value = Sale Proceeds + [Loss on sale x Tax Rate]

= \$147,000 + [\$111,750 + 21%]

= \$147,000 + 23,467.50

= \$170,467.50

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