Question

An asset that costs $5,000 will be depreciated straight-line to zero over its five-

    year tax life. The asset is to be used in a three-year project. At the end of the

    third year, the asset will be sold for $1,200. If the relevant tax rate is 34%, what is

    the salvage value of this asset?

Answer 1

Sale value of asset					$       1,200
Book value of asset					$       2,000
Loss on sale					$         -800
Tax saving on loss					$         -272
After tax salvage value					$       1,472
Working:
# 1	Straight line deprciation			=	(Cost - Salvage value)/Useful Life
				=	(5000-0)/5
				=	$       1,000
# 2	Acumulated depreciation for 3 years			=	$       1,000	*	3
				=	$       3,000
# 3	Cost				$       5,000
	Less accumulated depreciation				$       3,000
	Book Value				$       2,000
# 4	Tax saving on loss			=	$         -800	*	34%
				=	$         -272