A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,200,000 and can be sold for $685,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 21 percent. What is the aftertax salvage value of the equipment?

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andromache andromache · Answer 1 · 2019-11-13T10:08:40+01:00

Answer:

$657,271.60

Explanation:

For computing the after-tax salvage value , we need to do the following calculations:

1. Determine the book value:

= (Original cost of equipment) - (original cost of equipment × sum of depreciation percentage)

= ($3,200,000 ) - ($3,200,000 × 82.72%)

= $3,200,000 - $2,647,040

= $552,960

2. Determine the profit or loss on sale of equipment:

Profit = Sale value - Book value

= $685,000 - $552,960

= $132,040

3. Determine the tax on profit on sale of equipment:

= Profit × tax rate

= $132040 × 21%

= $27,728.40

4. Now finally calculation of the after-tax salvage value is shown below:

= Salvage value - profit tax

= $685,000 - $27,728.40

= $657,271.60