Question

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $23 million, of which 75% has been depreciated. The used equipment can be sold today for $6.9 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Answer 1

Equipment's after-tax net salvage value

Cost of the Equipment = $23,000,000

Accumulated Depreciation Expenses = Cost of the Equipment x Total Depreciation Rate

= $23,00,000 x 75%

= $17,250,000

Book Value of the Equipment today = Cost of the Equipment – Total Accumulated Depreciation

= $23,000,000 - $17,250,000

= $5,750,000

Sale Proceeds = $6,900,000

Gain on Sale of Equipment = Sale Proceeds – Book Value of the Equipment

= $6,900,000 - $5,750,000

= $1,150,000

Tax on Gain on Sale = Gain on sale x Tax rate

= $1,150,000 x 30%

= $345,000

Therefore, the Equipment's after-tax net salvage value = Sale Proceeds – Tax on Gain on sale

= $6,900,000 - $345,000

= $6,555,000

“Hence, the Equipment's after-tax net salvage value would be $6,555,000”