Question

Consider an equipment that costs $242,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project. At the end of the project the asset can be sold for $55,000. The tax rate is 21 percent. What is the after-tax salvage value?

$63,757.14

b.

$45,500.00

c.

$57,970.00

d.

$53,805.15

e.

$66,242.86

Answer 1

c. $57,970.00

The asset has a useful life of 7 years and we want to find the book value of the asset after 5 years. With straight-line depreciation, the depreciation each year will be

:Annual depreciation = $242,000 / 7

Annual depreciation = $34,571.4286

Accumulated depreciation = 5 * $34,571.4286

Accumulated depreciation = $172,857.14

Book value at the end of Year 5 = $242,000 - $172,857.14 = $69,142.86

Aftertax salvage value = $55,000 + ($69,142.86 - $55,000)(0.21)

Aftertax salvage value = $57,970.00