Question

Consider an asset that costs $193,600 and is depreciated straight line to zero over its 11-year tax life. The asset is to be used in a 7-year project at the end of the project, the asset can be sold for $24,200 Required If the relevant tax rate is 32 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.) $40,933.20 $37,034.80 $38,984.00 $16,456.00 $279.764.00 References eBook & Resources Multiple Choice Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project Difficulty: Basic Section 10.4 More about Project Cash Flow Previous attempt

Answer 1

Given that,

Cost of an asset = $193600

it is depreciated straight line to zero over the life of 11 years

So, annual depreciation is = cost/useful life = 193600/11 = $17600

So, Book value of asset after 7 years = cost - 7*annual depreciation = 193600 - 7*17600 = $70400

tax rate t = 32%

asset is sold for $24200 after 7 years

So, after tax cash flow from the sale of equipment is

ATCF = salvage value - ((salvage value - book value)*tax rate) = 24200 - ((24200-70400)*0.32) = $38984

So, Option C is correct.