Answer:
To determine the aftertax cash flow from the sale of the asset, we need to calculate the tax basis and the taxable gain on the sale.
The tax basis of the asset is its original cost minus accumulated depreciation. Since the asset is depreciated straight-line to zero over its eight-year tax life, the annual depreciation expense is:
Depreciation Expense = Cost / Tax Life = $690,000 / 8 = $86,250 per year
After five years, the accumulated depreciation is:
Accumulated Depreciation = Depreciation Expense x Years = $86,250 x 5 = $431,250
Therefore, the tax basis of the asset at the end of the project is:
Tax Basis = Cost - Accumulated Depreciation = $690,000 - $431,250 = $258,750
The taxable gain on the sale of the asset is the difference between the sale price and the tax basis:
Taxable Gain = Sale Price - Tax Basis = $147,000 - $258,750 = -$111,750
Since the taxable gain is negative, there is no taxable income from the sale of the asset. However, we can still calculate the aftertax cash flow by considering the tax savings from the depreciation deductions.
The total depreciation deductions over the five-year project period are:
Depreciation Deductions = Depreciation Expense x Years = $86,250 x 5 = $431,250
The tax savings from these deductions are:
Tax Savings = Depreciation Deductions x Tax Rate = $431,250 x 0.21 = $90,562.50
Therefore, the aftertax cash flow from the sale of the asset is:
Aftertax Cash Flow = Sale Price + Tax Savings = $147,000 + $90,562.50 = $237,562.50
Therefore, the aftertax cash flow from the sale of the asset is $237,562.50.