Question

In: Finance

13. Consider an asset that costs $511,000 and is depreciated straight-line to zero over its seven-year...

13. Consider an asset that costs $511,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $168,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)

Solutions

Expert Solution

So basically we first need to draw a depreciation schedule as shown in the image below. If useful life is of 7 years then the cost of 511000 will be depreciated by 73000 every year.

If it is used for 5 years and then sold off at 168000 then we need to see if we are selling it at a profit as compared to its depreciated value (closing balance at the end of year 5 or 146000). As we are selling ar a profit, we need to pay a tax of 34% on it and the net cashflow from the sale will be the sale value adjusted for the tax.


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