Question

Consider an asset that costs $457,600 and is depreciated straight-line to zero over its 11-year tax life. The asset is to be used in a 4-year project; at the end of the project, the asset can be sold for $57,200. If the relevant tax rate is 23 percent, what is the aftertax cash flow from the sale of this asset?

Answer 1

Depreciation per year	$41,600	(457600/11)
Accumulated depreciation up to 4 years	$166,400	41600*4
Book value of asset at end of 4th year	Cost - Accumulated depreciation
Book value of asset at end of 4th year	457600-166400
Book value of asset at end of 4th year	$291,200
Gain/(Loss) on sale of asset	57200-291200
Gain/(Loss) on sale of asset	-$234,000
Tax shield on loss	234000*23%
Tax shield on loss	$53,820
Loss on tax shield would be added to sale proceeds
After tax cash flow from sale of asset	57200+53820
After tax cash flow from sale of asset	$111,020
Thus, after tax cash flow from sale of asset is $111,020