Question

Problem 6-10 Calculating Salvage Value An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $8,200,000 and will be sold for $1,880,000 at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset? Refer to (MACRS schedule). (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567) Aftertax salvage value

Answer 1

Answer:

Initial Investment = $8,200,000
Useful Life = 4 years

Depreciation Year 1 = 20.00% * $8,200,000
Depreciation Year 1 = $1,640,000

Depreciation Year 2 = 32.00% * $8,200,000
Depreciation Year 2 = $2,624,000

Depreciation Year 3 = 19.20% * $8,200,000
Depreciation Year 3 = $1,574,400

Depreciation Year 4 = 11.52% * $8,200,000
Depreciation Year 4 = $944,640

Book Value at the end of Year 4 = $8,200,000 - $1,640,000 - $2,624,000 - $1,574,400 - $944,640
Book Value at the end of Year 4 = $1,416,960

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $1,880,000 - ($1,880,000 - $1,416,960) * 0.21
After-tax Salvage Value = $1,782,762