Question

Consider an asset that costs $237,600 and is depreciated straight-line to zero over its 12-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 $29,700.

   

Required :

If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

Options:

$19,602.00

$362,946.00

$46,530.00

$44,203.50

$48,856.50

Answer 1

The after tax cash flows are :

MV - (MV - BV) *TAX RATE

The asset is depreciated to zero at the end of the 12th year. (depreciation according to the straight line depreciation method for a single year is $237,600/12 = $19,800 ,therefore at the end of the 8th year the accumulated depreciation is $158400 so the BV of the asset is $237600 -158400 = $79,200)

= $29,700- ($29,700 - 79,200)*0.34

=$46,530

Therefore, the after tax cash flows from the sale of assets is $46,530

The correct option is option 3.

Note: As the asset is fully depreciated, its BV at end of 8th year is $79,200 and it is sold at a loss, so the after tax cash flows are calculated after adding the loss to the proceeds of the sale as the asset is sold for loss so no taxes needs to be paid,so it will be a tax advantage .