Consider an asset that costs $687,400 and is depreciated straight-line to zero o
ID: 2649181 • Letter: C
Question
Consider an asset that costs $687,400 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $135,700. (Do not round intermediate calculations.)
If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset?
The answer is NOT: $94,990.00, -$51,555.00
Required:If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset?
The answer is NOT: $94,990.00, -$51,555.00
Explanation / Answer
Depreciation per year = 687400/7=98200
Depreciation for 4 year = 98200*4 =$392,800
Cost of asset at end of project life = 687400-392800
= $ 294,600
Loss on sale = 135700 - 294600 = $ (158,900)
Tax benefit / shield =158900*30% = (47670)(Inflow)
So after tax cash flow = 135700+47670= $183,370