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Brummitt Corp., is evaluating a new 4-year project. The equipment necessary for the project will cost $1,900,000 and can be sold for $277,000 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 35 percent. What is the aftertax salvage value of the equipment?

Question

Brummitt Corp., is evaluating a new 4-year project. The equipment necessary for the project will cost 1,900,000andcanbesoldfor1,900,000 and can be sold for 277,000 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 35 percent. What is the aftertax salvage value of the equipment?

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Solution

To calculate the after-tax salvage value of the equipment, we need to consider the tax implications of the sale of the equipment at the end of the project. Here are the steps:

  1. Calculate the book value of the equipment at the end of the project. This is done by subtracting the accumulated depreciation from the initial cost of the equipment.

    The depreciation each year is calculated by multiplying the initial cost of the equipment by the MACRS depreciation rate.

    Year 1: 1,900,000∗20.001,900,000 * 20.00% = 380,000 Year 2: 1,900,000∗32.001,900,000 * 32.00% = 608,000 Year 3: 1,900,000∗19.201,900,000 * 19.20% = 364,800 Year 4: 1,900,000∗11.521,900,000 * 11.52% = 218,880

    The total depreciation over the 4 years is 380,000+380,000 + 608,000 + 364,800+364,800 + 218,880 = $1,571,680

    The book value at the end of the project is 1,900,000−1,900,000 - 1,571,680 = $328,320

  2. Calculate the gain or loss on the sale of the equipment. This is done by subtracting the book value from the sale price.

    Gain on sale = 277,000−277,000 - 328,320 = -$51,320. This is a loss, so there will be no tax on the sale.

  3. Calculate the after-tax salvage value. This is done by adding the tax savings from the loss on the sale to the sale price. The tax savings is calculated by multiplying the loss by the tax rate.

    Tax savings = -51,320∗3551,320 * 35% = 17,962

    After-tax salvage value = 277,000+277,000 + 17,962 = $294,962

So, the after-tax salvage value of the equipment is $294,962.

This problem has been solved

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