Question

Kennedy Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Kennedy can sell the used equipment today for $6 million, and its tax rate is 30%. What is the equipment’s after-tax salvage value?

	A) 5.4 million
	B) 4.6 million
	C) 4.8 million
	D) 5.0 million
	E) 5.2 million

Answer 1

Solution:-

To Calculate After Tax Salvage Value -

Book Value at the year end = $20 Million * (1-0.80)

Book Value at the year end = $4 Million

Salvage Value = $6 Million

Capital Gain = Book Value at the year end - Salvage Value

Capital Gain = $6 Million - $4 Million

Capital Gain = $2 Million

Tax on Capital Gain = Capital Gain * Tax Rate

Tax on Capital Gain = $2 Million * 30%

Tax on Capital Gain = $0.60 Million

After Tax Salvage Value = Salvage Value - Tax on Capital Gain

After Tax Salvage Value = $6 Million - $0.60 Million

After Tax Salvage Value = $5.40 Million

The Correct Answer is point A i.e. $5.40 Million

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