Question

QUESTION 6 An asset was purchased for $200,000 originally. Each year for the past 8 year, depreciation has been recorded which results in the asset having a current book value of $120,000. Now your firm is selling the asset for $145,000. What will be the total tax burden (or tax credit) caused by this sale? If it is a tax burden, enter the number as a positive number. If it is a tax credit, enter the number as a negative number. Assume a tax rate of 40%. QUESTION 7 Find the payback period for the following project. Year CF 0 -50 30 14 10 14

Answer 1

Ques-6)

Asset Purchased for = $200,000

Current Book Value of Asset after 8 years = $120,000

Firm is selling Asset for = $145,000

Profit on Sale on Asset = Current Book Value - Selling value

= $145,000 - $120,000

= $25,000

Total tax burden on sale = Profit on Sale on Asset*Tax rate

= $25,000*40%

= $10,000

So, Total Tax Burden caused by Sale is $10,000

Ques-7)

Calculating the Payback period of the Project:-

Year	Cash Flows of Project ($)	Cummulative Cash Flows of Project ($)
0	(50.00)	(50.00)
1	30.00	(20.00)
2	14.00	(6.00)
3	10.00	4.00
4	14.00	18.00
	18.00

Payback Period = Years before the Payback period occurs + (Cummulative cash flow in the year before recovery/Cash flow in the year before recovery)

= 2 years + (6/10)

= 2.60 years

So, Payback Period is 2.60 years

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