Allen Air Lines must liquidate some equipment that is being replaced. The equipm
ID: 2648117 • Letter: A
Question
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $15 million, of which 80% has been depreciated. The used equipment can be sold today for $3.75 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $15 million, of which 80% has been depreciated. The used equipment can be sold today for $3.75 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
Explanation / Answer
Original Cost of the Equipment : $15000000
Depreciation till date 80% ie $15000000*80%
gives depreciation tilldate $12000000
Book Value as on date : 15000000- 12000000 = $3000000
Sale price today $3750000
Sale price - written down value = $3750000 - $3000000
ie $750000
Extra Tax on this profit of $750000 @ 30%
$225000
So salvage value is 3750000 - 225000 ie $3525000
Explanation : The written down value gives a tax benefit of 30% and sale value attracts tax expense of 30%. So there is an extra tax expense for sale value - written down value. This extra tax expense is deducted from the market value of the asset as on today to arrive at the salvage value of the asset.