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Consider an asset that costs $1398017 and is depreciated straight-line to zero over its 11-year tax...

Consider an asset that costs $1398017 and is depreciated straight-line to zero over its 11-year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $129577. If the relevant tax rate is 0.36, what is the aftertax cash flow from the sale of this asset?

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Answer #1

Dep Per anum = [ Purchase Price - Salvage Value ] / Useful life

= [ 1398017 - 0 ] / 11

= 1398017 / 11

= 127092.45

Accumulated dep after 6 Years = 127092.45 * 6

= 762554.73

Book Value after 6 Years = COst - Acc Depreciation

= 1398017 - 762554.73

= 635462.27

Loss on sale = Book Value - sale Value

= 635462.27 - 129577

= 505885.27

Tax shield on Loss = Loss * Tax rate

= 505885.27 * 36%

= 182118.7

After Tax CF = Sale Value + Tax shield

= 129577 + 182118.7

= 311695.7

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