Consider an asset that costs $640,000 and is depreciated straight-line to zero o
ID: 2621907 • Letter: C
Question
Consider an asset that costs $640,000 and is depreciated straight-line to zero over its eight-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 $175,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?
Consider an asset that costs $640,000 and is depreciated straight-line to zero over its eight-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 $175,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?
Explanation / Answer
Hi,
Please find the detailed answer as follows:
After Tax Cash Flow = Sales Value -/+ Tax on Gain/Loss on Sales of Asset
Gain/Loss on Sale of Asset = Sales Value - Book Value
Book Value = Cost - Depreciation for 5 Years = 640000 - 640000/8*5 = 240000
Loss on Sale of Asset = 175000 - 240000 = -65000
After Tax Cash Flow = Sales Value -/+ Tax on Gain/Loss on Sales of Asset = 175000 + .35*65000 = 197750
Answer is 197750.
Notes:
Tax on Loss on Sale of Asset will be added back to Sales Value to get After Tax Cash Flow.
Thanks.