Question

Your company purchases new equipment for $80,000 and depreciates it on a straight line basis over a 5 year period resulting in annual depreciation expense of $16,000. At the end of the 4th year, a buyer purchases it from your company for $30,000. If your company's marginal tax rate is 40%, what is the after tax cash flow or after tax salvage value at the end of year 4

Answer 1

Answer:

$24,400

Explanation:

The computation of the after tax salvage value at the end of year 4 is shown below:

Before that following calculation need to be determined

Book value = Cost - Accumulated depreciation

= $80,000 - ($16000 × 4 years)

= $16,000

Now gain on sale is

= $30,000 - $16,000

 = $14,000

Now

After-tax cash flow is

= Sale proceeds - (Tax rate × Gain on sale)

= $30,000 - ($14000 × 40%)

 = $24,400