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

1. 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.

2. Your company is evaluating a new project that will require the purchase of an asset for $25,000 installed. The asset will be depreciated S/L for 5 years to zero salvage. Your company is expecting the asset to have a market value of $4,000 at the end of 5 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 5 years.

b) Calculate the gain or (loss) from the sale of the asset at the end of 5 years? (And indicate whether it is a gain or a loss.

c) Calculate the tax consequences from the sale of the asset in 5 years and indicate whether it is a tax liability or tax saving.

Solutions

Expert Solution

1…..Cost of the asset	22000
Less;Accumulated depreciation at ned of 4 yrs.(22000/5*4)	-17600
Carrying /Book value of the asset at end of 4 yrs.	4400
Market value of the asset at end of 4 yrs.	5500
So, gain on sale(5500-4400)	1100
So, tax liability at endof 4 yrs. On gain on sale(1100*30%)	330
so, After-tax cash flow on sale=5500-330=	5170
The present value of the after-tax cash flow on sale of the asset at end of 4 yrs.(5170/1.12^4)	3285.63

So, Answers are:
a) After tax asset value for the asset at the end of 4 years.	4400
b) Gain from the sale of the asset at the end of 4 years	1100
c) Tax consequences from the sale of the asset at end of 4 yrs.----- tax liability -----	330

2….Cost of the asset	25000
Less;Accumulated depreciation at end of 5 yrs.(25000/5*5)	-25000
Carrying /Book value of the asset at end of 5 yrs.	0
Market value of the asset at end of 5 yrs.	4000
So, gain on sale(4000-0)	4000
So, tax liability at end of 5 yrs. On gain on sale(4000*30%)	1200
so, After-tax cash flow on sale=4000-1200=	2800
The present value of the after-tax cash flow on sale of the asset at end of 5 yrs.(2800/1.12^5)	1588.80

So, Answers are:
a)After tax asset value for the asset at the end of 5 years.	0
b) Gain fom the sale of the asset at the end of 5 years	4000
c)Tax consequences from the sale of the asset in 5 years ----- tax liability	1200

jeff jeffy answered 1 year ago

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