Question

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

Answer 1

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