Consider an asset that costs $360,800 and is depreciated straight-line to zero o
ID: 2824723 • Letter: C
Question
Consider an asset that costs $360,800 and is depreciated straight-line to zero over its 15-year tax life. The asset is to be used in a 8-year project; at the end of the project, the asset can be sold for $45,100.
If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset? (
Consider an asset that costs $360,800 and is depreciated straight-line to zero over its 15-year tax life. The asset is to be used in a 8-year project; at the end of the project, the asset can be sold for $45,100.
Explanation / Answer
Step-1:Calculation of Straight Line depreciation Straight line depreciation = (Cost-Salvage value)/Useful Life = (360800-0)/15 = $ 24,053.33 Step-2:Calculation of accumulated depreciation for 8 years Accumulated depreciation = Annual depreciation x life of use = $ 24,053.33 x 8 = $ 1,92,426.67 Step-3:Calculation of book value at the end of 8 years Cost $ 3,60,800.00 Less accumulated depreciation for 8 years $ 1,92,426.67 Ending Book Value $ 1,68,373.33 Step-4:Calculation of after tax cash flow from the sale of asset Sales Price $ 45,100.00 Less:Book Value $ 1,68,373.33 Profit /(Loss) on sale $ -1,23,273.33 Tax on profit 0 After tax profit on sale of asset $ 45,100.00 Thus, after tax profit on sale is $ 45,100 Note: Tax is paid on the profit on sale, not on loss on sale.So, sale proceeds is also the after tax cash flow.