Question

A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,050,000 and can be sold for $670,000 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 34 percent. What is the aftertax salvage value of the equipment?

Answer 1

Answer:

$718,606.4

Explanation:

The first step is to calculate the accumulated depreciation

=$3,050,000×(0.2+0.32+0.192+0.1152)

= $3,050,000×0.8272

= $2,522,960

The accumulated depreciation is then subtracted from the book value in purchase to get the book value on sale

= $3,050,000-$2,522,960

= $527,040

The next step is to subtract the book value on sale from the salvage value

= $527,040-$670,000

= -$142,960

Loss of - $142,960

The tax gain on disposal can be calculated as follows

= -$142,960×34/100

= -$142,960×0.34

= -$48,606.4

Therefore, the after-tax salvage value can be calculated as follows

= salvage value-tax disposal

= $670,000-(-48,606.4)

= $670,000+$48,606.4

= $718,606.4

Hence the aftertax salvage value of the equipment is $718,606.4