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Problem 11-03 Net Salvage Value Allen Air Lines must liquidate some equipment that is being replaced....

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.

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Solutions

Expert Solution

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

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