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 $105,000. If the relevant tax rate is 22 percent, what is the aftertax cash flow from the sale of this asset?

Answer 1

The asset has a useful life of 8 years and we want to find the book value of the asset after 5 years. The depreciation each year will be

:Annual depreciation = $635,000 / 8

Annual depreciation = $79,375

Accumulated depreciation = 5 * $79,375

Accumulated depreciation = $396,875

Book value at the end of Year 5 = $635,000 - $396,875 = $238,125

Aftertax salvage value = $105,000 + ($238,125 - $105,000)(0.22)

Aftertax salvage value = $134,287.50