Please, explain in a very accurate and detailed way, provide logical and consist
ID: 2756731 • 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
1. Calculation of taxable Income
The equipment has already been depreciated for 75% of cost. Hence, book value of the asset as on today is 25% of the cost. This equipment can now be sold at the market value. The taxable income shall be capital gain on the sale of this equipment.
Taxbale income = Capital gain on sale of equipment = Selling price of the equipment - Book value of equipment on date of sale.
The residual vlaue of the equipment is only the expected sale value used for calculation of depreciation and is irrelevant in this case.
2. Calculation of after-tax salvage value
After tax salvage value shall be the selling price received on sale of equipment less the tax paid on the capital gain on the sale.
The capital gain on the sale of the equipment shall be taxbale and tax shall be paid on the same at the prevailing tax rate.
Thus, after tax salvage value for final cashflow = Selling price of equipment - Tax on capital gain