An asset used in a four-year project falls in the five-year MACRS class for tax

Question

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 $6,150,000 and will be sold for $1,350,000 at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Refer to Table below:

Year                Three-Year               Five-Year                   Seven-Year

1                        33.33%                     20.00%                     14.29%

2                        44.45                         32.00                         24.49

3                        14.81                         19.20                         17.49

4                         7.41                           11.52                        12.49

5                                                            11.52                         8.93

6                                                             5.76                           8.92

7                                                                                                8.93

8                                                                                                4.46

Explanation / Answer

book value4 = 6150000 - 6150000 ( 0.2 + 0.32 + 0.1920+0.1152)

book value = 1062720

after tax salvage value = 1350000 + (1062720 - 1350000) * 0.34

= 1252324.8

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