Question

(3 of 10)

A new piece of specialty equipment costs $2,000,000 and will be depreciated to an expected salvage value of $250,000 on a straight-line basis over its 5-year life. Assuming a tax rate of 40%, what is its after-tax salvage value if the equipment is actually sold after 3 years for $1,250,000?

$180,000

$500,000

$500,000

$1,130,000

$1,250,000

Answer 1

$1,130,000

Step-1:Book Value of equipment at the end of year 3
Cost			$ 20,00,000.00
Less accumulated depreciation for 3 years			$ 10,50,000.00
Book value of equipment at the end of year 3			$    9,50,000.00
Working:
Straight Line depreciation		=	(Cost - Salvage Value)/Useful life
		=	(2000000-250000)/5
		=	$    3,50,000.00
Accumulated depreciation for 3 years		=	$    3,50,000.00	*	3
		=	$ 10,50,000.00
Step-2:Calculation of after tax salvage value at the end of 3 years
Sales		a	$       12,50,000
Book value		b	$          9,50,000
Profit on sale		c=a-b	$          3,00,000
Tax on profit		d=c*40%	$          1,20,000
Aftr tax salvage value		e=a-d	$       11,30,000