Consider an asset that costs $334,400 and is depreciated straight-line to zero o
ID: 2767686 • Letter: C
Question
Consider an asset that costs $334,400 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $41,800.
If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? Hint: If sold at a loss, taxes will be negative, so ATSV = selling price - taxes on gain, would result in subtracting negative taxes.(Do not round your intermediate calculations.)
$73,986.00
$27,170.00
$70,286.70
$524,602.00
$77,685.30
Consider an asset that costs $334,400 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $41,800.
Explanation / Answer
Cost of the asset = $334400 Useful tax life of asset 10 years Depreciation using straight line method = $334400 / 10 = $33440 per year Depreciation for 6 years = $33440 *6 = $200640 Net book value of the asset at the end of 6th year = $334400 - $200640 = $133760 At the sixth year asset sold for = $41800 Loss from sale of asset = $133760 - $41800 = $91960 Tax saving due to loss on sale of asset = $91960 * 35% = $32186 Hence, After tax cash flow from sale of asset = sale value of asset + Tax saving due to loss on sale of asset After tax cash flow from sale of asset = $41800 + $32186 = $73986