Question

both questions please and thank you

Four years ago, your employer purchased for $2.250,000 a new office telephone system to support its complex of office buildings. Your supervisor wants to know what its after-tax salvage value would be if it were sold today and replaced with a new system. The system purchased four years ago is being depreciated straight-line for tax purposes over 5 years to a book value of $50,000 (because when the system was purchased the Company believed it could be sold for $50,000 at the end of 5 years). Your company has a 21% marginal income tax rate for capital gains. You have done some checking around and have learned this old system has a market value of $800,000. If the company could sell the old system for this price, what would be its after-tax salvage value? $263,500 $247,500 $853,500 $350,000 $734,900

Answer 1

Solution : - 1) Correct answer is $734,900

Working

Cost of Telephone System = $ 2,250,000

Less: Salvage value = $ 50,000

Cost of telephone system to be Depreciated = 2,250,000 - 50,000 = 2,200,000

Usefull life = 5 Years

Depreciation per Year = 2,200,000 / 5 = $ 440,000

Accumulated Depreciation till 4 years = 440,000*4 = $1,760,000

Book Value of Telephone System = 2,250,000 - 1,760,000 = $490,000

Selling Price = $800,000

Less : Book Value of Telephone System= $490,000

Capital Gain = $310,000 ( 800,000-490,000)

Tax on Capital Gain (21% of 310,000 ) = $65,100

Therefore after tax Salvage Value = $ 800,000-$ 65,100 = $ 734,900

(2) The Correct answer is (d) i.e Yes, It has an opportunity cost and the proposed project reflected the $ 214,500 net gain for the land as such.