Consider an asset that costs $511,000 and is depreciated straight-line to zero o
ID: 2709032 • 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? (Do not round intermediate calculations.)
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? (Do not round intermediate calculations.)
Explanation / Answer
The Value of the Assets is 511,000. Since it will be reduced to zero in the its seven year life.
The depreciation per year will be 511,000/7 =$73,000
Now since the asset is sold for 168,000 at the end of the period and the asset is fully depreciated, there is no tax benefit of depreciation.
Hence the after tax cash flow be 168,000 * (1-0.34) = 110,880
Hence after tax cash flow from sale will be $110,880.