Question

Consider an asset that costs $255,200 and is depreciated straight-line to zero over its 13-year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $31,900.

Required : If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

A) $67,775.23

B) $71,163.99

C) $21,054.00

D) $64,386.47

E) $650,134.00

Answer 1

A) $67,775.23

Working;

Step-1:Calculation of book value at the end of 6- year project

Cost

$   2,55,200.00

Less accumulated depreciation for 6 years

$   1,17,784.62

Book value at the end of 6 years

$   1,37,415.38

Working:

# 1

Calculation of straight line depreciation

=

(Cost - Salvage value)/Useful life

=

(255200-0)/13

=

$       19,630.77

# 2

Accumulated depreciation for 6 years

=

Annual depreciation * number of years used

=

$       19,630.77

*

6

=

$   1,17,784.62

Step-2:Calculation of after tax cash flow from the sale of asset

Sale price

a

$       31,900.00

Less book value

b

$   1,37,415.38

Profit on sale

c=a-b

$ -1,05,515.38

Tax on profit

d=c*34%

$     -35,875.23

After tax cash flow from the sale

e=a-d

$       67,775.23