Question

Consider an asset that costs $635,000 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 $125,000. If the relevant tax rate is 35.00%, what is the aftertax cash flow from the sales of this asset?

Answer 1

Answer 2

Consider an asset that costs $635,000 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 $125,000.

Required:

If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? Round your answer to 2 decimal places What is the aftertax salvage value? Solution: Book Value at the end of 5 year = 635000 - 635000/8*5 = $ 238125 Loss from sale of Asset = 125000-238125 = 113125 Tax saving on loss = 113125*35% = 39593.75 Aftertax salvage value = Salvage Value + Tax saving on loss = 125000 + 39593.75 Aftertax salvage value =$ 164,593.75