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 $7,500,000 and will be sold for $1,740,000 at the end of the project. If the tax rate is 22 percent, what is the aftertax salvage value of the asset?
Initial Investment = $7,500,000
Useful Life = 4 years
Depreciation Year 1 = 20.00% * $7,500,000
Depreciation Year 1 = $1,500,000
Depreciation Year 2 = 32.00% * $7,500,000
Depreciation Year 2 = $2,400,000
Depreciation Year 3 = 19.20% * $7,500,000
Depreciation Year 3 = $1,440,000
Depreciation Year 4 = 11.52% * $7,500,000
Depreciation Year 4 = $864,000
Book Value at the end of Year 4 = $7,500,000 - $1,500,000 -
$2,400,000 - $1,440,000 - $864,000
Book Value at the end of Year 4 = $1,296,000
After-tax Salvage Value = Salvage Value - (Salvage Value - Book
Value) * tax rate
After-tax Salvage Value = $1,740,000 - ($1,740,000 - $1,296,000) *
0.22
After-tax Salvage Value = $1,740,000 - $97,680
After-tax Salvage Value = $1,642,320
So, the after-tax salvage value is $1,642,320
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