Question

Net Salvage Value

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $25 million, of which 80% has been depreciated. The used equipment can be sold today for $7.5 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

$

Answer 1

Solution:

As per the information given in the question

Original Cost of the Asset = $ 25,000,000

Depreciation already provided on the asset = Original Cost of the Asset of 80 %

The Accumulated depreciation = Original Cost of the Asset * 80 %

= $ 25,000,000 * 80 %

= $ 20,000,000

Thus the Cost of The Asset = $ 25,000,000                            -   ( A )

Accumulated Depreciation = $ 20,000,000                          -   ( B )

Thus Book value of the Asset = (A ) – ( B ) = $ 25,000,000 - $ 20,000,000 = $ 5,000,000

Sale value of the Asset = 7,500,000

Statement showing calculation of After Tax net salvage value:

Sl.No.	Particulars	Amount
1.	Sale value of the Asset	$ 7,500,000
2.	Less : Book value of the Asset	$ 5,000,000
3.	Profit on sale of Asset = (1) – (2)	$ 2,500,000
4.	Tax Rate	30 %
5.	Tax payable on profit of sale of asset = Profit on sale of Asset * Tax rate = $ 2,500,000 * 0.30 = (3) * (4)	$ 750,000
6.	After tax net salvage value = Sale value of asset - Tax payable on profit of sale of asset = $ 7,500,000 - $ 750,000 = (1) - (5 )	$ 6,750,000

Thus the After tax net salvage value is = $ 6,750,000