Please, explain in a very accurate and detailed way, provide logical and consist

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

Taxable Income will be calculated as follow :-

Equipment is depreciated upto 75% , that means Equipment has only 25% of remaining Book Value. As per question, Equipment can be sold above its residual value or Salvage value (value remaining after using or depreciating).

In this case , Company will earn Realised gain on selling Equipment over market fair value .Such a gain will lead to a tax burden on company , because selling Assets over its residual value after depreciating is taxable income and consequently subject to tax.

  Gain = Sales price(Market price) - book Value( residual value after Depreciating)

Note:- Book Value of remaining 25%

For Example,

If Asset is of $100000,

It is 75% depreciated and

Its market price is $30000

So, The BooK Value = $100000 * (100% - 75%)

= $25000

Realised Gain = $30000 - $25000

= $5000

Therefore , Taxable income will be of $5000

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