Question

An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $9,000,000 and will be sold for $2,520,000 at the end of the project. If the tax rate is 24 percent, what is the aftertax salvage value of the asset? Refer to (MACRS schedule) (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567)

Answer 1

Given

Asset Cost A=$9,000,000

Salvage Value S=$2,520,000

Tax Rate T=24%

Year	Depreciation Rate d	Depreciation D=d*A	Cumulative Depreciation  C	Book Value B=A-C
1	20%	1800000	1800000	7200000
2	32%	2880000	4680000	4320000
3	19.20%	1728000	6408000	2592000
4	11.52%	1036800	7444800	1555200
5	11.52%	1036800	8481600	518400
6	5.76%	518400	9000000	0

From Above calculation we find that Book Value at end of 4 years B=$1555200

Since Book Value is less than Salvage value so we have to pay tax on amount above Book Value at end of 4 years.

After tax Salvage value =S-(S-B)*T=2520000-(2520000-1555200)*24%=$2288448