Consider an asset that costs $712,000 and is depreciated straight-line to zero o
ID: 2627061 • Letter: C
Question
Consider an asset that costs $712,000 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 $184,000. 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 $712,000 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 $184,000. 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:
Annual Depreciation = Cost/Estimated Life = 712000/8 = 89000
Depreciation for 5 Years = 89000*5 = 445000
Book Value of Machine After 5 Years = 712000 - 445000 = 267000
Loss on Sale of Machine = Book Value - Sales Value = 267000 - 184000 = 83000
Tax Saving on Loss = Loss on Sale of Machine*Tax Rate = 83000*35% = 29050
After Tax Cash Flow = Sales Value + Tax Savings = 184000 + 29050 = $213050
Answer is $213050.
Thanks.