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 $8,500,000 and will be sold for $2,140,000 at the end of the project. If the tax rate is 22 percent, what is the aftertax salvage value of the asset?

Answer 1

To find the BV at the end of four years, we need to find the accumulated depreciation for the first four years. Add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost. Doing so, we get:

BV₄ = $8,500,000 − $8,500,000(0.2000 + 0.3200 + 0.1920 + 0.1152)

BV₄ = $1,468,800

Aftertax salvage value = $2,140,000 + ($1,468,800 – $2,140,000)(0.22)

Aftertax salvage value = $1,992,336