Question

In: Finance

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

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