Question

An asset used in a three-year project falls in the three-year MACRS class for tax purposes. The MACRS percentage rates starting with Year 1 are: 33.33, 44.45, 14.81, and 7.41. The asset has an acquisition cost of $2.6 million and will be sold for $1.1 million at the end of the project. If the tax rate is 21percent, what is the aftertax salvage value of the asset? $742,519.10 $726,000.00 $832,056.60 $909,458.60 $887,560.15

Answer 1

The aftertax salvage value of the asset is $869,000.

Step-by-step explanation:

Calculate the depreciation expense for each year of the project using the MACRS percentages and the acquisition cost of $2.6 million.

- Year 1 depreciation expense: 33.33% * $2.6 million = $866,580

- Year 2 depreciation expense: 44.45% * $2.6 million = $1,156,700

- Year 3 depreciation expense: 14.81% * $2.6 million = $384,060

- Year 4 depreciation expense: 7.41% * $2.6 million = $192,660

Calculate the book value of the asset at the end of Year 3 by subtracting the total depreciation expense from the acquisition cost.

- Book value at the end of Year 3: $2.6 million - ($866,580 + $1,156,700 + $384,060) = $192,660

Determine the taxable gain or loss from the sale of the asset by comparing the selling price of $1.1 million to the book value at the end of Year 3.

- Taxable gain or loss: $1.1 million - $192,660 = $907,340

Calculate the tax liability by multiplying the taxable gain or loss by the tax rate of 21%.

- Tax liability: 21% * $907,340 = $190,741.40

Calculate the aftertax salvage value by subtracting the tax liability from the selling price of the asset.

- Aftertax salvage value: $1.1 million - $190,741.40 = $909,458.60

Therefore, the correct answer is $909,458.60.