An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table)

Question

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $12,240,000 and will be sold for $2,720,000 at the end of the project.

If the tax rate is 32 percent, what is the aftertax salvage value of the asset?

$2,526,423

$1,849,600

$2,913,577

$2,652,744

$2,400,102

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $12,240,000 and will be sold for $2,720,000 at the end of the project.

Explanation / Answer

Depreciation on the project=$12,240,000(0.2+0.32+0.192+0.1152)=$10124928

Hence book value as on date of sales=(12,240,000-$10124928)=$2,115,072

Hence gain on sales=(2,720,000-2,115,072)=$604928

Hence after tax salvage value=Sales proceeds-(Tax rate*Gain on sales)

=$2,720,000-(0.32*$604928)

=$2,526,423(Approx)(A)

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