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Schroeder Electronics is considering a project which will require the purchase of $5 million in new...

Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. The tax rate is 40%. What is the amount of the after-tax salvage value of the equipment?
A) $200,000
B) $300,000
C) $400,000
D) $500,000

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Answer #1
Book value = purchase price*remaining life/total life
= 5000000*0/5
= 0
After tax salvage value = selling price*(1-tax rate)+book value*tax rate
=500000*(1-0.4)+0*0.4
=300000
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