Consider an asset that costs $653,000 and is depreciated straight-line to zero o
ID: 2742599 • Letter: C
Question
Consider an asset that costs $653,000 and is depreciated straight-line to zero over its eight-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 $152,000.
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. Round your answer to 2 decimal places (e.g., 32.16).)
Consider an asset that costs $653,000 and is depreciated straight-line to zero over its eight-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 $152,000.
Explanation / Answer
Depreciation p.a=Cost of Asset- Salvage value/life of asset
=$653,000-0/5
=$130,000/8
=$81,625
Accumulated depreciation= $81,625 x 5
=$408,125
Book value= Cost of Asset - Accumulated depreciation
=$630,000-$408,125
=$221,875
Tax on gain on loss = (cash proceeds – book value) × tax rate
=(152,000-221,875 ) x 0.34
=-$69,875 x 0.34
=-$23,757
After tax salvage value = cash proceeds – tax on gain or loss
=152,000-(-23,757)
=152,000+23,757
=$175,757