Kasper Film Co. is selling off some old equipment it no longer needs because its
ID: 2774095 • Letter: K
Question
Kasper Film Co. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $22,500, of which 80% has been depreciated. The firm can sell the used equipment today for $7,500, and its tax rate is 35%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
$5,558
$5,850
$6,143
$6,450
$6,772
$5,558
$5,850
$6,143
$6,450
$6,772
Explanation / Answer
Book value as on date of sale=Cost-Accumulated depreciation
=$22500(1-0.8)=$4500
Hence gain on sale=(7500-4500)=$3000
Hence after-tax salvage value=Sale proceeds-(Tax rate*gain on sale)
=7500-(3000*35%)
=$6450.
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