Consider an asset that costs $202,400 and is depreciated straight-line to zero o
ID: 2633064 • Letter: C
Question
Consider an asset that costs $202,400 and is depreciated straight-line to zero over its 5-year tax life. The asset is to be used in a 2-year project; at the end of the project, the asset can be sold for $25,300.
If the relevant tax rate is 32 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)
Required :If the relevant tax rate is 32 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)
Explanation / Answer
The asset has an 5-year useful life and we want to find the BV of the asset after 2 years. With straight-line depreciation, the depreciation each year will be:
Annual depreciation = $202,400 / 5
Annual depreciation = $40480
So, after 2 years, the accumulated depreciation will be:
Accumulated depreciation = 2($40480)
Accumulated depreciation = $80960
The book value at the end of year 2 is thus:
BV2 = $202,400