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An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $8,800,000 and will be sold for $1,920,000 at the end of the project.

Required: If the tax rate is 35 percent, what is the aftertax salvage value of the asset?
A) $4,100,000
B) $4,320,000
C) $4,560,000
D) $5,000,000

User Mlwn
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Final answer:

To calculate the aftertax salvage value of the asset, subtract the sum of annual depreciation expenses from the acquisition cost to find the book value. Multiply the salvage value by (1 - tax rate) to find the aftertax salvage value. In this case, the aftertax salvage value is $1,248,000.

Step-by-step explanation:

To calculate the aftertax salvage value of the asset, we need to first calculate the book value of the asset at the end of the project. The book value is the original acquisition cost minus the depreciation taken over the life of the asset.

Using the MACRS depreciation method, the asset falls in the 5-year class, which means it will be depreciated over 5 years using the MACRS table. From the table, the depreciation percentages are as follows: Year 1: 20%, Year 2: 32%, Year 3: 19.2%, Year 4: 11.52%, and Year 5: 11.52%.

To calculate the annual depreciation expense, we multiply the acquisition cost by the respective depreciation percentage for each year. The annual depreciation expenses are: Year 1: $1,760,000, Year 2: $2,816,000, Year 3: $1,699,200, Year 4: $1,019,520, and Year 5: $1,019,520.

The book value of the asset at the end of the project is the acquisition cost minus the sum of all the annual depreciation expenses. In this case, it is $8,800,000 - ($1,760,000 + $2,816,000 + $1,699,200 + $1,019,520 + $1,019,520) = $1,485,760.

The aftertax salvage value is calculated by multiplying the salvage value of the asset by (1 - tax rate). In this case, it is $1,920,000 * (1 - 0.35) = $1,248,000.

Therefore, the aftertax salvage value of the asset is $1,248,000.

User Ecem
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