Question

An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $9,400,000 and will be sold for $2,840,000 at the end of the project. If the tax rate is 23 percent, what is the aftertax salvage value of the asset?

Answer 1

Answer:

The after-tax salvage value of the asset is $125,073.

Explanation:

Use following schedule to calculate accumulated depreciation after 4 years

Year   MACRS rates   Depreciation   Accumulated Depreciation

1            20%                 $188,000                $188,000

2           32%                 $300,800               $488,800

3           19.20%             $180,480                $669,280

4           11.52%              $108,288                $777,568

Salvage Value after 4 years = Acquisition cost - Accumulated Depreciation after 4 years = $940,000 - $777,568 = $162,432

After Tax Salvage value = $162,432 x ( 1 - 23% ) = $162,432 x ( 1 - 0.23 ) =$162,432 x 0.77 = $125,073