Question

Consider an asset that costs $176,000 and is depreciated straight-line to zero over its 13-year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $22,000.

  

If the relevant tax rate is 24 percent, what is the aftertax cash flow from the sale of this asset?

Multiple Choice

• $39,464.62

• $37,491.39

• $16,720.00

• $322,972.00

• $41,437.85

Answer 1

$39,464.62

Step-1:Book value at the end of year 6
Year end	Cost	Depreciation expense	Accumulated Depreciation expense	Book Value
	a	b	c	d=a-c
1	$    1,76,000.00	$ 13,538.46	$     13,538.46	$    1,62,461.54
2	$    1,76,000.00	$ 13,538.46	$     27,076.92	$    1,48,923.08
3	$    1,76,000.00	$ 13,538.46	$     40,615.38	$    1,35,384.62
4	$    1,76,000.00	$ 13,538.46	$     54,153.85	$    1,21,846.15
5	$    1,76,000.00	$ 13,538.46	$     67,692.31	$    1,08,307.69
6	$    1,76,000.00	$ 13,538.46	$     81,230.77	$       94,769.23
Working;
	Straight line depreciation	=	(Cost - Salvage Value)/Useful life
		=	(176000-0)/13
		=	$     13,538.46
Step-2:After tax sale proceeds
	Sale proceeds	a	$     22,000.00
	Book Value at the end of year 6	b	$     94,769.23
	Profit on sale	c=a-b	$         -72,769
	Tax on profit	d=c*24%	$         -17,465
	After tax sale proceeds	e=a-d	$     39,464.62