Question

Consider an asset that costs $700,000 and is depreciated straight-line to zero over its 9- 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 $183,000. What is the book value of the equipment at the end of the 6 years? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Book value If the relevant tax rate is 23 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Aftertax salvage value

Answer 1

1) Solution: 233,333
Working: Accumulated depreciation by the end of year 6:
[Asset cost - Salvage value] / Asset's life * No. of years expired
[700,000 - 0] / 9 * 6
466,666.67
BV of asset = Purchase price - Accumulated depreciation = 700,000 - 466,666.67 = 233,333.33
2) Solution: 11,577
Working:

Sale value   183,000     
Less: Book value   233,333.33     
Loss on sale of asset   -50,333.33     
         
Tax saving @23%   11,576.67     
         
After tax cash flow from sale of asset = Sale amount + Savings on tax
After tax cash flow from sale of asset = 183,000 + 11,576.67 = 194,576.67