4.4 Consider an asset that costs $440,000 and is depreciated straight-line to ze

Question

4.4

Consider an asset that costs $440,000 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $55,000.

If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

Consider an asset that costs $440,000 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $55,000.

Explanation / Answer

Depreciation = (440000-0)/8 = 55000 per year

Book value at the end of 5 years = 440000 - 5*55000 = 165000

After tax cashflow = 55000 - 0.34*(55000-165000) = 92400

Loss on the sale = 55000-165000 = -110000 generated a tax savings of 0.34*110000 = 37400

After tax cashflow = $92400

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