Consider an asset that costs $595,000 and is depreciated straight-line to zero o
ID: 2775229 • Letter: C
Question
Consider an asset that costs $595,000 and is depreciated straight-line to zero over its seven-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 $180,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?
Consider an asset that costs $595,000 and is depreciated straight-line to zero over its seven-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 $180,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?
Explanation / Answer
Depreciation per year = 595,000 / 7
= 85,000
Depreciation for 5 year = 85000 * 5 = $ 425,000
Book value at the end of 5 year = 595,000 + 425,000 = $ 170,000
capital gain /(loss) = sale value - book value
= 180,000 - 170,000
= 10,000 gain
capital gain tax = 10,000 * .34 = $ 3400
After tax cash flow = sale value -capital gain tax
= 180,000 - 3400
= $ 176,600