Question

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

Initial value of asset (including shipping and installation): $12 million

The company uses straight line depreciation to depreciate the asset to a book value of $2 million by the end of the life of the project which is ten years.

Expected salvage value (market price) of the asset upon termination of project: $3.2 million.

Marginal tax rate: 30%

Answer 1

Annual depreciation expense		=	(Cost-Expected salvage value)/Life
		=	($12million-2million)/10
		=	$10million/10
		=	$1 million
Calculation of accumulated depreciation
	(a)	(b)	(.c)=a+b
Year	Opening balance	Annual depreciation	Accumulated depreciation
1	0	$1,000,000	$1,000,000
2	1000000	$1,000,000	$2,000,000
3	2000000	$1,000,000	$3,000,000
4	3000000	$1,000,000	$4,000,000
5	4000000	$1,000,000	$5,000,000
6	5000000	$1,000,000	$6,000,000
7	6000000	$1,000,000	$7,000,000
8	7000000	$1,000,000	$8,000,000
9	8000000	$1,000,000	$9,000,000
10	9000000	$1,000,000	$10,000,000
Tax on salvage value		=	(Salvage value-book value)*taxrate
	Book value	=	Initial cost-accumulated depreciation
		=	$12,000,000-$10,000,000
		=	$   2,000,000.00
Tax on salvage value		=	($3,200,000-$2,000,000)*30%
		=	$1,200,000*30%
		=	$       360,000.00
After tax salvage value		=	Salvage value-tax on salvage value
		=	$3,200,000-$360,000
		=	$   2,840,000.00