Select Any One Of the Following Options: Expected salvage value of investment in machine for a project is Rs. 50,000. The residual book value of the machine is Rs. 20,000. The incometax rate applicable to firm is 25%. What is the post tax salvage value ?Rs. 42,500Rs.20,000Rs. 22,500Rs.30,000
Question
Select Any One Of the Following Options: Expected salvage value of investment in machine for a project is Rs. 50,000. The residual book value of the machine is Rs. 20,000. The incometax rate applicable to firm is 25%. What is the post tax salvage value ?Rs. 42,500Rs.20,000Rs. 22,500Rs.30,000
Solution
The post-tax salvage value can be calculated using the following steps:
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Determine the difference between the salvage value and the book value. In this case, it is Rs. 50,000 - Rs. 20,000 = Rs. 30,000. This is the gain on disposal of the machine.
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Calculate the tax on this gain. The tax rate is 25%, so the tax would be 25% of Rs. 30,000 = Rs. 7,500.
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Subtract this tax from the salvage value to get the post-tax salvage value. So, Rs. 50,000 - Rs. 7,500 = Rs. 42,500.
So, the post-tax salvage value is Rs. 42,500.
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