Question

An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $7,400,000 and will be sold for $1,700,000 at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset?

Answer 1

Cost of Acquisition = $7,400,000
Useful Life = 4 years

Depreciation Year 1 = 20.00% * $7,400,000
Depreciation Year 1 = $1,480,000

Depreciation Year 2 = 32.00% * $7,400,000
Depreciation Year 2 = $2,368,000

Depreciation Year 3 = 19.20% * $7,400,000
Depreciation Year 3 = $1,420,800

Depreciation Year 4 = 11.52% * $7,400,000
Depreciation Year 4 = $852,480

Book Value at the end of Year 4 = $7,400,000 - $1,480,000 - $2,368,000 - $1,420,800 - $852,480
Book Value at the end of Year 4 = $1,278,720

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $1,700,000 - ($1,700,000 - $1,278,720) * 0.21
After-tax Salvage Value = $1,700,000 - $88,468.80
After-tax Salvage Value = $1,611,531.20

So, the aftertax salvage value of the asset is $1,611,531.20