Question

Consider an asset that costs $655,000 and is depreciated straight-line to zero over its 8-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 $129,000. If the relevant tax rate is 24 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

Step-1:Calculation of straight line depreciation
Straight line depreciation			=	(Cost - Salvage value)/Useful life
			=	(655000-0)/8
			=	$           81,875
Step-2:Calculation of book value at the end of year 6
Cost				$       6,55,000
Less accumulated depreciation for 6 years	$ 81,875	*6	=	$       4,91,250
Book value at the end of year 6				$       1,63,750
Step-3:Calculation of after tax cash flow from the sale of this asset
Sales value			a	$       1,29,000
Book value of asset			b	$       1,63,750
Profit on sale			c=a-b	$         -34,750
Tax on profit			d=c*24%	$           -8,340
After tax cash flow from asset			e=a-d	$       1,37,340