Question

Consider an asset that costs $705,000 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $189,000. If the relevant tax rate is 24 percent, what is the aftertax cash flow from the sale of this asset?

Answer 1

first let us know the accumulated depreciation on this asset by the end of year 6:

(cost - salvage value) / life in years * number of years expired

($705,000 - 0) / 9 years * 6 years

=>$470,000.

book value of asset = purchase price - accumulated depreciation

=>705,000 -470,000

=>235,000.

now

sale value	189,000
less: book value	(235,000)
loss on sale of asset	(46,000)

tax savings on loss of sale = 46,000 *24% =>$11,040.

This tax saving will be a cash inflow.

now,

after tax cash flow from sale of asset = sale value + tax savings

=>189,000+11,040

=>$200,040.