Question

Kasper Film Co. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $24,000, of which 71.1% has been depreciated. The firm can sell the used equipment today for $6,500, and its tax rate is 25%. What is the equipment's after-tax salvage value for use in the terminal year of a capital budgeting analysis?

Answer 1

Using the above provided details, the equipment's after-tax salvage value can be calculated as below:

Cost of Equipment = $ 24,000

Depreciation Accumulated till date on equipment: 71.1% * cost

= 71.1% * 24,000 = $ 17,064

Current Value of Asset = Cost - Depreciation till date

= 24,000 - 17,064 = $ 6,936

As the current value of Asset is more than the sale value, so there will be loss on sale of asset

Loss on Sale = Sale value of Asset - Current Value of Asset

= 6,500 - 6,936 = $ - 436

So, the After-tax salvage value of the asset is

= Sale proceeds - ( -loss on sale * tax rate)

= 6500 - ( -436 * 25%)

= 6500 - ( -109 )

= 6500 + 109 = $ 6,609

Here as the company has incurred loss on the sale of asset, so the company will receive tax credits against the loss incurred on sale. So the value of $ 109 can be taken as tax credit, so it has been added to the after tax salvage value.

Hope I was able to solve your concern. If you are satisfied hit a thumbs up !!