Please, explain in a very accurate and detailed way, provide logical and consist
ID: 2756729 • Letter: P
Question
Please, explain in a very accurate and detailed way, provide logical and consistent answer. It is very important in this task. Provide VERY DETAILED explanation.
Assume the company is now at the end of the final year of a project and 75% of the equipment cost has been depreciated. The firm can sell the used equipment today at the market price the exceeds equipment residual value How a taxable income will be calculated and what is the equipments after-tax salvage value for use in a capital budjeting analysis as a part of a final cash flow?
Explanation / Answer
Answer:
Assume that original cost of equipment = $22,500
Salvage value = $6000
And residual value can be found like this:
% depreciated on equip. 75%
Tax rate 40%
Equipment cost $22,500
Accumulated deprec. 16,875
Current book value of equipment $5,625
Market value of equipment 6,000
Gain (or loss): Market value Book value $375
Tax rate = 40%
Taxes paid on gain () or credited (+) on loss -150
AT salvage value = market value +/ taxes $ 5,850
This is how income and after tax salvage value of the equipment can be calculated.