Question

You are estimating your after-tax salvage value for a project's assets. Use the following information to form an estimate. The asset was purchased for $100,000, brand new

The project will last 3 years
You will pay $35,000 for employee training to implement the asset
Your accountants estimate that the book value of the asset will be $25,000 by the end of the project
The current price for a 3-year old version of the asset is $50,000. Market experts do not expect the price to change over the next 5 years.
The tax rate is 20%
What is the expected (estimated) after-tax salvage value of the asset if you sell it at the end of the project? Write your answer without a $

Answer 1

The estimated after-tax salvage value of the asset at the end of the project is $45,000 calculated by deducting the tax liability from the potential selling price of $50,000.

Step-by-step explanation:

To estimate the after-tax salvage value of the asset at the end of the project, we must first determine the asset's potential selling price and then account for taxes. Given that the current price for a 3-year-old version of the asset is $50,000, and market experts expect this price to remain stable for the next 5 years, we can estimate that the asset will sell for $50,000 at the end of the project. However, taxes must be taken into consideration.

The tax liability is calculated on the gain, which is the difference between the selling price and the book value. With a book value of $25,000 and a selling price of $50,000, the gain on the asset is $25,000. A tax rate of 20% applies to this gain, resulting in a tax liability of $5,000 (20% of $25,000). Finally, the after-tax salvage value is obtained by subtracting the tax liability from the selling price: selling Price - Tax Liability = After-Tax Salvage Value
$50,000 - $5,000 = $45,000

So, the expected after-tax salvage value of the asset at the end of the project is $45,000.