Consider an asset that costs $666,000 and is depreciated straight-line to zero o
ID: 2633916 • Letter: C
Question
Consider an asset that costs $666,000 and is depreciated straight-line to zero over its nine-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 $169,000. If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset?
Consider an asset that costs $666,000 and is depreciated straight-line to zero over its nine-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 $169,000. If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset?
Aftertax salvage value $Explanation / Answer
Cost of an Asset = $ 666000
Depreciation straight line to zero in useful life of 9 years = 666000/9
=$74000
The asset being used in the project for 5years so book value of the asset at the end of 5 years is
= $666000 - (74000 x 5)
=$ 666000 - $370000
=$296000
The asset sold for $169000 at the end of 5 years
loss = sale price - book value
= 169000- 296000
=$ (127000)
Tax rate of 30% on loss
= (127000) x 30%
=$(38100)
The company had a book loss of -127000, so the tax on this loss will act as tax savings since their taxable income will be reduced with this amount of $38100
Thus after tax salvage value = $ 169000+$38100
=$ 207100