Q1: Your company is evaluating a new project that will require the purchase of an asset...

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.

Solutions

Expert Solution

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

jeff jeffy answered 1 year ago

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