Question

. T-Mobile 8:38 AM 98% Question ? ... 6 Unanswered A project requires $600,000 in equipment which is expected to have a salvage value of $40,000 when the project ends in 8 years. If the tax rate is 30% and the equipment sells for $50,000 (instead of $40,000) at the end of 8 years, which of the following is true? The company will owe $3000 in taxes. B The company will owe $15,000 in taxes. The company will receive a tax credit. Not enough information to determine. 2 attempts left. Submit

Answer 1

In this case, the expected salvage value of equipment is $ 40000, and on that basis, depreciation will be calculated.

If assumed that depreciation is calculated under straight line method, then,

depreciation = (Original cost-Expected salvage value)/useful life of the asset

Therefore, Depreciation = ($600000-$40000)/8= $70000

Hence, depreciation of $70000 will be an expenditure over the useful life of the asset.

Hence, at the end of year 8, the book value of the equipment will be $ 40000.

However, if the equipment is sold for $ 50000, then there results in profit on sale of equipment to the extent of $ 10,000 ($50000-$40000)

Tax rate = 30%

Therefore, company will owe $ 3000 ($10000 x 30%) in taxes.

Hence, Option A is correct