Question

Consider an asset that costs $369,600 and is depreciated straight-line to zero over its 9-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 $46,200.

  

If the relevant tax rate is 24 percent, what is the aftertax cash flow from the sale of this asset?

Multiple Choice

• $64,680.00

• $35,112.00

• $61,446.00

• $323,412.00

• $67,914.00

Answer 1

Annual depreciation = Cost of assets/Number of useful lives

                                 = $ 369,600/9

                                 = $ 41,066.67

Book value of asset at the end of the project

= Cost of assets - Accumulated depreciation for 6 years

= $ 369,600 – ($ 41,066.67 x 6)

= $ 369,600 - $ 246,400.02 = $ 123,199.98

After tax cash flow from the sale = MV + (BV – MV) x Tax rate

                                                     = $ 46,200 + ($ 123,199.98 - $ 46,200) x 0.24

                                                  = $ 46,200 + ($ 76,999.98 x 0.24)

                                                    = $ 46,200 + $ 18,480

                                                    = $ 64,680

After tax cash flow from the sale of asset is $ 64,680

Hence option “$ 64,680.00” is correct answer.