Question

how does this present itself in a capital budgeting statement: (show working) please include worked example

a current truck can be sold for 55 000 today, it was purchased in 2006 for $500 000 and it is being depreciated over a 20 year tax life. if the company does not purchase a new truck they will continue to operate the current truck

Answer 1

The question looks incomplete . However I will try and answer your query with the limited data.

As it is given that :

Truck Purchased in 2006

Current Year 2019

It's useful life = 20 years

Cost of Purchase = $500,000

Depreciation per year using straight line method = $500,000/20 = $25,000 per year

The Book value of the truck in 2019 after 15years would be $500,000 - ($25,000 x 15) = $125,000

But the re-sale price is $55,000

Hence Capital Loss would be $(125,000 - 55,000) = $70,000 if the truck is sold today .

In absence of tax rates, we cannot compute the tax shield for the capital loss.

If the truck is not sold off and used for the rest of its useful life then at the end of the 20th year, its value would be zero.

Hope this helps. In case you need further clarification, feel free to put in comment and also provide the full question.