Consider an asset that costs $211,200 and is depreciated straight-line to zero o
ID: 2658286 • Letter: C
Question
Consider an asset that costs $211,200 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $26,400.
If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?
$257,412.00
$41,302.80
$39,336.00
$37,369.20
$17,160.00
Consider an asset that costs $211,200 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $26,400.
Explanation / Answer
annual depreciation = 211200/10 = 21120
asset is used for 7 years so depreciation for 7 years = 21120 x 7 =147840
therefore book value = 211200 - 147840 = 63360
now salvage value is 26400
as book value is greater than salvage value, there is a capital loss
tax saving on capital loss = 35% (book value - salvage value) = 35% (63360 - 26400) = 12936
this will be termed as cash inflow
so after tax cash flow from sale of assets = salvage value + tax saving on capital loss on sale
After tax cash flow from sale of assets = 26400 + 12936 = 39336
ANSWER : $39336