Consider an asset that costs $511,000 and is depreciated straight-line to zero o
ID: 2650450 • Letter: C
Question
Consider an asset that costs $511,000 and is depreciated straight-line to zero over its seven-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 $168,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?
Consider an asset that costs $511,000 and is depreciated straight-line to zero over its seven-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 $168,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?
Explanation / Answer
Book Value of the Asset on the date of sale = Original cost - Depreciation till date of sale
= 511000-(511000/7*5)
= 511000-365000 i.e 146000
Sale of asse = 168000
Gain on sale of asset = 168000-146000 i.e 22000
Tax on gain of 22000 = 22000*34% i.e 7480
After tax cash flow received from sale of asset = 168000-7480 i.e 160520