Question

A new piece of specialty equipment costs $1,500,000 and will be depreciated to an expected salvage value of $300,000 on a straight-line basis over its 3-year life. Assuming a tax rate of 30%, what is its after-tax salvage value if the equipment is actually sold after 2 years for $600,000? 

$70,000 

$240,000 

$560,000 

$770,000 

$630,000

Answer 1

Annual depreciation=(Cost-Salvage value)/Useful life

=(1,500,000-300,000)/3=$400,000

Hence book value as on date of sale=cost-Accumulated depreciation

=$1,500,000-(400,000*2)=$700,000

Hence loss on sale=(700,000-600,000)=$100,000

Hence after-tax salvage value=Sale proceeds+(Tax rate*loss on sale)

=$600,000+($100,000*0.3)

which is equal to

=$630,000.