Answer:
a. $14,700
b. $9,600
Explanation:
Total cost of the equipment = Purchase price + installation costs = $20,000 + $2,500 = $22,500
Salvage value = $4,500
Amount to be depreciated = $22,500 - $4,500 = $18,000
Depreciation rate = 1 ÷ 4 = 0.25, or 25%
Annual depreciation = $18,000 × 25% = $4,500
Equipment book value after 2 years = $22,500 - ($4,500 × 2) = $13,500
(a) What would be the cash flow from salvage if the asset sold after 2 years for $15,500
Gross profit on equipment disposal = Sales amount - Equipment book value = $15,500 - $13,500 = $2,000
Tax = $2,000 × 40% = $800
Net profit on equipment disposal = $2,000 - $800 = $1,200
Cash flow = Equipment book value + Net profit on equipment disposal = $13,500 + $1,200 = $14,700
(b) What would be the cash flow from salvage if the asset sold after 2 years for $7,000
Loss on equipment disposal = Sales amount - Equipment book value = $7,000 - $13,500 = $6,500
Tax shield difference = $6,500 × 40% = $2,600
Cash flow = $7,000 + $2,600 = $9,600
