Question

kelce manufacturing has equipment that it purchased 4 years ago for $2,200,000. the equipment was used for a project that was intended to last for 6 years. however, due to low demand, the project is being shut down. the equipment was depreciated using the straight-line method and can be sold for $330,000 today. the company's tax rate is 21 percent. what is the aftertax salvage value of the equipment?

Answer 1

The aftertax salvage value of Kelce Manufacturing's equipment, which is being sold for $330,000 after 4 years of straight-line depreciation, is $414,699.99 when considering the tax benefit from the loss on disposal.

Step-by-step explanation:

To calculate the aftertax salvage value of the equipment, we must first determine the book value of the equipment at the time of sale. Since the equipment was purchased for $2,200,000 and was being depreciated over 6 years using the straight-line method, the annual depreciation is $2,200,000 / 6 years = $366,666.67. After 4 years, the accumulated depreciation would be $366,666.67 * 4 = $1,466,666.68, giving a book value of $2,200,000 - $1,466,666.68 = $733,333.32.

Given the equipment can be sold for $330,000 today, this amount is lower than the book value, resulting in a loss of $733,333.32 - $330,000 = $403,333.32. This loss can be used to offset taxable income, so the tax benefit from this loss is $403,333.32 * 21% = $84,699.99.

The aftertax salvage value is the sale price plus the tax benefit, which is $330,000 + $84,699.99 = $414,699.99.