Question

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $23 million, of which 85% has been depreciated. The used equipment can be sold today for $5.75 million, and its tax rate is 40%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Answer 1

Equipment's after-tax net salvage value

Book Value of the Equipment

Book Value of the Equipment = Cost of the Equipment – Total Accumulated depreciation

= $23,000,000 – [$23,00,000 x 85%]

= $23,000,000 - $19,550,000

= $3,450,000

Gain on Sale of Equipment

Gain on Sale of Equipment = Sale proceeds – Book Value of the Equipment

= $5,750,000 - $3,450,000

= $2,300,000

Tax on Gain on sale of Equipment

Tax on Gain on sale of Equipment = Gain on Sale of Equipment x Tax Rate

= $2,300,000 x 40%

= $920,000

Therefore, the Equipment’s net after-tax salvage value = Sale Proceeds - Tax on Gain on sale of Equipment

= $5,750,000 - $920,000

= $4,830,000

“Hence, the Equipment's after-tax net salvage value will be $4,830,000”