Question

A potential new project has an expected salvage value of $300,000 and an expected book value of $200,000 at the end of its 5-year expected life. what taxes would the company own at the end of year 5 because of this project's expected salvage value of their tax rate is 40%.

a. $0
b. $40,000
c. $80,000
d. $120,000

Answer 1

The company would owe $40,000 in taxes at the end of year 5 for the project's salvage value, calculated as 40% of the difference between the salvage value and book value. Therefore correct option is B

Step-by-step explanation:

The calculation for the taxes owed by the company at the end of year 5 due to the project's expected salvage value is based on the tax rate and the difference between the salvage value and the book value.

The gain on the sale is the difference between the expected salvage value ($300,000) and the expected book value ($200,000), which amounts to $100,000.

Since the tax rate is 40%, the taxes on this gain would be 40% of $100,000, which is $40,000.

Therefore, the correct answer is option b. $40,000.