Consider an asset that costs $492,800 and is depreciated straight-line to zero o
ID: 2740767 • Letter: C
Question
Consider an asset that costs $492,800 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $61,600.
If the relevant tax rate is 33 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)
rev: 09_18_2012
$122,584.00
$128,713.20
$895,060.00
$41,272.00
$116,454.80
Consider an asset that costs $492,800 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $61,600.
Explanation / Answer
Firrst compute accumlated depreciation upto 5th year ending.
Depreciation pa.unde stright line method =492,800/10 =$ 49,280 p.a
Accumulated depreciation for 5 years =$ 49,280*5 =$ 246,400
Carrying value of asset at the end of 5th year =Cost of asset -Accumulated depreciation for 5 years
=492,800-246,400
=$ 246,400
Computation of aftertax cash flow from the sale of this asset
Sale proceeds =$ 61,600
Carrying value of asset =$ 246,400
Loss on sale =$ 184,800
Tax shelter on loss =$ 184,800 *33% =$ 60,984
After tax flow from the sale of asset =$ 61,600+$ 60,984 =$ 122,584