Question

Consider an asset that costs $660,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $135,000. If the relevant tax rate is 25 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)

My Work:

1. depreciation expense per year: 660,000/8 = $82,500

2. value after 5 years: 660,000-(82,500*5) = $237,500

3. tax expense: 237,000*.25 = $61,875

4. aftertax cash flow: 237,500 - 61,875 = $185,625

I answered this and it was incorrect can you please explain where I went wrong.

Answer 1

depreciation expense per year: 660,000/8 = $82,500

value after 5 years: 660,000-(82,500*5) = $237,500

the book value of the asset is 237,500 but it is sold for 135,000.

there will be tax applicable on profit made on selling of asset. In this case, the company has incurred loss by selling at 135,000. Hence, there wont be any tax applicable. so aftertax cashflow would be 135,000.