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An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for...

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $12,420,000 and will be sold for $2,760,000 at the end of the project.

  

If the tax rate is 23 percent, what is the aftertax salvage value of the asset?

Multiple Choice

  • $2,618,820

  • $2,125,200

  • $2,901,180

  • $2,749,762

  • $2,487,879

Solutions

Expert Solution

Following is the depreciation schedule:

Year Opening balance Investment Depreciation Closing balance
0 $ 124,20,000.00 $ 124,20,000.00
1 $    124,20,000.00 $ 24,84,000.00 $    99,36,000.00
2 $      99,36,000.00 $ 39,74,400.00 $    59,61,600.00
3 $      59,61,600.00 $ 23,84,640.00 $    35,76,960.00
4 $      35,76,960.00 $ 14,30,784.00 $    21,46,176.00
5 $      21,46,176.00 $ 14,30,784.00 $      7,15,392.00
6 $         7,15,392.00 $    7,15,392.00 $                         -  

Opening balance = previous year's closing balance
Closing balance = Opening balance+Investment-Depreciation

a) At the end of year 4 the book value is 21,46,176

b)

  • SP = 27,60,000
  • Book Value = 21,46,176
  • Profit = SP - Book value
    • 2760000-2146176= $6,13,824.00
  • Tax on Profit = 0.23 x 613824
    • Tax on Profit = $1,41,179.52
  • After tax CF = SP - Tax
    • 276000-141179.52= $26,18,820.48
  • So the first option is correct

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