An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,180,000 and will be sold for $1,380,000 at the end of the project. If the tax rate is 34 percent, what is the after tax salvage value of the asset?

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MrRoyal MrRoyal · Answer 1 · 2020-03-02T13:53:30+01:00

Answer:

After Tax Salvage Value = $1,273,887.36

Explanation:

Given

Acquisition Price = $6,180,000

Selling Price = $1,380,000

Tax Rate = 34%

Total Duration = 5 years

Used = 4 years

To start with we'll calculate the depreciated value for the first four years (when it was actively used).

Using MACRS Depreciation table (see attachment below).

The depreciation at year 1 = 20.00%

Year 2 = 32.00%

Year 3 = 19.20%

Year 4 = 11.52%

Calculating the Depreciation

Asset Value = Actual Asset - Depreciated Value

Depreciation = $6,180,000 - $6,180,000(20.00% + 32.00% + 19.20% + 11.52%)

Value = $6,180,000 - $6,180,000(82.72%)

Value = $6,180,000 - $5,112,096

Value = $1,067,904

After Tax Salvage Value = $1,380,000 + ($1,067,904 − 1,380,000)(34%)

After Tax salvage value = $1,273,887.36