Question

Karsted air services is now in the final year of a project. The equipment originally cost $32 million, of which 75% has been depreciated. Karsted can sell the used equipment today for $8 million, and its tax rate is 35%. What is the equipment's after-tax salvage value?

Answer 1

The equipment's after-tax salvage value is $5.2 million.

Step-by-step explanation:

Karsted air services is now in the final year of a project. The equipment originally cost $32 million, of which 75% has been depreciated. To find the equipment's after-tax salvage value, we need to calculate the tax on the equipment's book value and subtract that from the sale price.

1. First, we calculate the book value of the equipment, which is the original cost minus the accumulated depreciation: $32 million - (0.75 * $32 million) = $8 million.
2. Next, we calculate the tax on the equipment's book value: $8 million * 0.35 (tax rate) = $2.8 million.
3. Finally, we subtract the tax from the sale price to find the after-tax salvage value: $8 million - $2.8 million = $5.2 million.