In: Finance
Q1: Your company is evaluating a new project that will require the purchase of an asset for $22,000
installed. The asset will be depreciated S/L for 5 years to a zero salvage.
Your company is expecting the asset to have a market value of $5,500 at the end of 4 years.
The applicable tax rate is 30% and the cost of capital is 12%
a) Calculate the after tax asset value for the asset at the end of 4 years.
b) Calculate the gain or (loss) from the sale of the asset at the end of 4 years? (And indicate
whether it is a gain or a loss.
c) Calculate the tax consequences from the sale of the asset in 4 years and indicate whether it is a
tax liability or tax saving.
Tax rate | 30% | ||||||
Calculation of annual depreciation | |||||||
Depreciation | Year-1 | Year-2 | Year-3 | Year-4 | Total | ||
Cost | $ 22,000 | $ 22,000 | $ 22,000 | $ 22,000 | |||
Dep Rate | 20.00% | 20.00% | 20.00% | 20.00% | |||
Depreciation | Cost * Dep rate | $ 4,400 | $ 4,400 | $ 4,400 | $ 4,400 | $ 17,600 | |
Calculation of after-tax salvage value | |||||||
Cost of machine | $ 22,000 | ||||||
Depreciation | $ 17,600 | ||||||
WDV | Cost less accumulated depreciation | $ 4,400 | |||||
Sale price | $ 5,500 | ||||||
Profit/(Loss) | Sale price less WDV | $ 1,100 | |||||
Tax liability | Profit/(Loss)*tax rate | $ 330 | |||||
Sale price after-tax | Sale price less tax | $ 5,170 |