Question

Consider an asset that costs $360,800 and is depreciated straight-line to zero over its 15-year tax life. The asset is to be used in a 8-year project; at the end of the project, the asset can be sold for $45,100.

  

Required :

If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset? (

Answer 1

Step-1:Calculation of Straight Line depreciation
	Straight line depreciation			=	(Cost-Salvage value)/Useful Life
				=	(360800-0)/15
				=	$       24,053.33
Step-2:Calculation of accumulated depreciation for 8 years
	Accumulated depreciation			=	Annual depreciation x life of use
				=	$       24,053.33	x	8
				=	$   1,92,426.67
Step-3:Calculation of book value at the end of 8 years
	Cost				$   3,60,800.00
	Less accumulated depreciation for 8 years				$   1,92,426.67
	Ending Book Value				$   1,68,373.33
Step-4:Calculation of after tax cash flow from the sale of asset
	Sales Price				$       45,100.00
	Less:Book Value				$   1,68,373.33
	Profit /(Loss) on sale				$ -1,23,273.33
	Tax on profit				0
	After tax profit on sale of asset				$       45,100.00
Thus, after tax profit on sale is			$ 45,100
Note: Tax is paid on the profit on sale, not on loss on sale.So, sale proceeds is also the after tax cash flow.