Question

Assume a firm sells the following depreciable asset at the end of its useful life:

Sale price = $1,000. Book value (for tax purposes) = $900. Tax rate = 30%

What is the after-tax salvage value of this asset?

a) $700
b) $800
c) $850
d) $900

Answer 1

The after-tax salvage value of the asset is calculated by subtracting the tax on the gain from the sale price, resulting in an after-tax salvage value of $970, which is not among the provided options.

Step-by-step explanation:

To calculate the after-tax salvage value of an asset, we need to consider the difference between the sale price and the book value of the asset, multiplied by the tax rate, and then subtract that tax liability from the sale price. The sale price of the asset is $1,000, and the book value is $900, with a given tax rate of 30%.

The gain on the sale is the sale price minus the book value, which would be $1,000 - $900 = $100. The tax on the gain is 30% of $100, which equals $30. Thus, the after-tax salvage value is the sale price minus the tax on the gain, or $1,000 - $30 = $970. None of the options provided (a) $700, (b) $800, (c) $850, (d) $900 matches the correct answer, which is $970.