Question

Power Manufacturing has equipment that it purchased 4 years ago for $2,400,000. The equipment was used...

Power Manufacturing has equipment that it purchased 4 years ago for $2,400,000. The equipment was used for a project that was intended to last for 6 years. However, due to low demand, the project is being shut down. The equipment was depreciated using the straight-line method and can be sold for $370,000 today. The company's tax rate is 40 percent. What is the aftertax salvage value of the equipment?

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Answer #1

Equipment Cost=$2,400,000

Useful Life=6 years

Annual Depreciation=2400000/6=

$400,000

Accumulated Depreciation in 4 years=4*400000=$1,600,000

Book value of equipment at end of 4 years=(2400000-1600000)=$800,000

sales price =$370,000

Loss on Sale of equipment =(800000-370000)=$430,000

Assuming that the company has enough taxable income during year 4,

Tax Saving due to loss=430000*40%=$172,000

After Tax Salvage Value =370000+172000=$542,000

After tax Salvage Value of the equipment $542,000
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