Calculate the annual depreciation expense, accumulated depreciation, book value, and after tax salvage value associated with...

Calculate the annual depreciation expense, accumulated depreciation, book value, and after tax salvage value associated with an asset given the following information:

Initial value of asset (including shipping and installation): $10 million

Useful life of the asset is 16 years (although the company plans to operate it for the project’s life of only ten years and then sell it). The company uses straight line depreciation for its depreciable assets.

Expected salvage value (market price) of the asset upon termination of project: $4.5 million.

Marginal tax rate: 25%

Expert Solution

Calculation of annual depreciation, book value and accumlated depreciation at the end of the year

Year	1	2	3	4	5	6	7	8	9	10
Value at the beginning of the year	10,000,000	9,375,000	8,750,000	8,125,000	7,500,000	6,875,000	6,250,000	5,625,000	5,000,000	4,375,000
Annual Depreciation at SLM (1000000/16)	625,000	625,000	625,000	625,000	625,000	625,000	625,000	625,000	625,000	625,000
Book Value at year end	9,375,000	8,750,000	8,125,000	7,500,000	6,875,000	6,250,000	5,625,000	5,000,000	4,375,000	3,750,000
Accumulated Depreciation	625,000	1,250,000	1,875,000	2,500,000	3,125,000	3,750,000	4,375,000	5,000,000	5,625,000	6,250,000

Salvage Value of the asset 4,500,000

Book Value at the end of 10th Year 3,750,000

Capital Gain 7,50,000

Tax on Capital Gain @ 25% = 187,500

After Tax Salvage Value of the asset = 4,500,000 - 187,500 = 4,312,500

jeff jeffy answered 2 years ago

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