Question

A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,250,000 and can be sold for $645,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 35 percent. What is the aftertax salvage value of the equipment

Answer 1

Answer: $615,810‬

Explanation:

The Book Value of the Asset at the end of 4 years will be;

= Cost of equipment - Accumulated Depreciation

= 3,250,000 - ( 3,250,000 * ( 20% + 32% + 19.20% + 11.52%))

= 3,250,000 - 2,688,400

= $561,600

The Equipment will be sold at $645,000 meaning a gain is made

= 645,000 - 561,600

= $83,400

Tax to be paid is;

= 83,400 * 0.35

= $29,190

After-tax salvage value of the equipment = Sales Price - Tax

= 645,000 - 29,190

= $615,810‬