Question

Consider an asset that costs $211,200 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $26,400.

  

Required :

If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

rev: 09_18_2012

$42,636.00

$44,880.00

$17,160.00

$47,124.00

$257,412.00

Answer 1

Let’s calculate the cash flow from selling the asset at the end of project life

The original purchase price of asset = $211,200

Useful life = 8 years

With straight line method,

Annual depreciation = $211,200/8 = $26,400

The asset is used for 5 year project

Therefore, 5 years accumulated depreciation = Annual depreciation * 5

= $26,400 *5 = $132,000

And book value of asset at the end of year 5 = Original Purchase Price - Accumulated Depreciation          

= $211,200 - $132,000

= $79,200

But the asset can be sold for $26,400 (resale value), which is less than its book value of $79,200 at the end of year 5 therefore firm will generate a tax credit on the sale of its asset.

Tax credit = (book value at the end of year 5 – resale value) * tax rate

= ($79,200 - $26,400) *35% = $52,800 * 35% = $18,480

Therefore the after-tax cash flow from the sale of this asset = resale value + tax credit

=$26,400 + $18,480 = $44,880

Therefore correct answer is option $44,880.00