Question

Brummitt Corp., is evaluating a new 4-year project. The equipment necessary for the project will cost $2,000,000 and can be sold for $281,000 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 34 percent. What is the aftertax salvage value of the equipment?

Answer 1

$302964

Step-by-step explanation:

The salvage value of an asset is the value of the asset ater it has being used during its useful life.

The depreciation percentage each year is 20.00 percent (0.2), 32.00 percent (0.32), 19.20 percent (0.192), 11.52 percent (0.1152), and 11.52 percent (0.1152).

Since the project being evaluated is a four year project, we would use onlh the depreciation for four years.

The salvage value = cost of equipment(100% - depreciation percentage for four years)

salvage value = $2000000(1 - 0.2 - 0.32 - 0.192 - 0.1152) = $345600

Book value = $281000

Gain = salvage value - book value = $345600 - $281000 = $64600

aftertax salvage value = book value + (tax rate × gain) = $281000 + (0.34 ×$64600) = $302964

Answer 2

The aftertax salvage value of the equipment is $302,964

Step-by-step explanation:

In order to calculate the aftertax salvage value of the equipment, first we would need to calculate the Book value of the equipment after 4 years as follows:

Book value of the equipment after 4 years = Purchase price *(1-depreciation rate each year)

= $2,000,000*(1-0.2-0.32-0.192-0.1152)

=$345,600

Loss on sale = $281,000-345,600

= 64600

Tax benefit on loss = $64,600*34% = $21,964

Therefore, After tax salvage value = selling price + tax benefit

= $281,000 + $21,964

=$302,964

The aftertax salvage value of the equipment is $302,964