In: Finance
Problem 11-03
Net Salvage Value
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $25 million, of which 85% has been depreciated. The used equipment can be sold today for $8.75 million, and its tax rate is 40%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$
A | Computation of Book Value | |
a | Original Cost | $ 25,000,000 |
b | Accumulated Depreciation | $ 21,250,000 |
($ 250,00,000 *85%) | ||
c | Net Book Value (a-b) | $ 3,750,000 |
B | Computation of Tax Amount | |
Sale Price of Equipment | $ 8,750,000 | |
Less: Net Book Value | $ 3,750,000 | |
Taxable Value | $ 5,000,000 | |
Less: Tax @ 40% | $ 2,000,000 | |
C | Computation of After Tax Net Salvage Value | |
Sale Price of Equipment | $ 8,750,000 | |
Less: Taxes on Capital Gain | $ 2,000,000 | |
After Tax Net Salvage Value | $ 6,750,000 |