Question

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $18,180,000 and will be sold for $4,040,000 at the end of the project.

  

Required:

If the tax rate is 33 percent, what is the aftertax salvage value of the asset?

Options

$3,743,496

$2,706,800

$4,336,504

$3,930,671

$3,556,322

Answer 1

$3,743,496

Step-1:Calculation of book value at the end of project
Depreciation Schedule:
Year	Cost	Depreciation rate	Depreciation Expense	Accumulated depreciation	Ending Book Value
	a	b	c=a*b	d	e=a-d
1	$       1,81,80,000	20%	$       36,36,000	$     36,36,000	$ 1,45,44,000
2	$       1,81,80,000	32%	$       58,17,600	$     94,53,600	$     87,26,400
3	$       1,81,80,000	19.20%	$       34,90,560	$ 1,29,44,160	$     52,35,840
4	$       1,81,80,000	11.52%	$       20,94,336	$ 1,50,38,496	$     31,41,504
5	$       1,81,80,000	11.52%	$       20,94,336	$ 1,71,32,832	$     10,47,168
6	$       1,81,80,000	5.76%	$       10,47,168	$ 1,81,80,000	0.00
		100.00%	$    1,81,80,000
So, book value at the d end of year 4 is			$       31,41,504
Step-2:After tax salvage value
Sales price			$       40,40,000
Less
Tax on sale			$ 2,96,504
After tax salvage value			$       37,43,496
Working:
Sales price			$       40,40,000
Book Value at the of year 4			$       31,41,504
Profit on sale			$          8,98,496
Tax on sale			$          2,96,504