Question

brummitt corporation, is evaluating a new 4-year project. the equipment necessary for the project will cost $2,150,000 and can be sold for $287,000 at the end of the project. the asset is in the 5-year macrs class. the depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. the company's tax rate is 22 percent. what is the aftertax salvage value of the equipment?

Answer 1

The aftertax salvage value of the equipment is $268,110.40.

Step-by-step explanation:

The aftertax salvage value of the equipment can be calculated using the formula:

Aftertax Salvage Value = Salvage Value - Tax on Gain

Salvage Value = $287,000

Tax on Gain = Tax Rate x (Salvage Value - Book Value)

Book Value = Initial Cost - Cumulative Depreciation

Cumulative Depreciation = Depreciation Percentage x Initial Cost x Cumulative Factor

Cumulative Factor = 1 + Depreciation Percentage + (Depreciation Percentage x (1 - Depreciation Percentage) x (1 - Depreciation Percentage)) + ...

Using the given depreciation percentages, we can calculate the book value and then find the tax on gain to calculate the aftertax salvage value.

Let's calculate the aftertax salvage value step by step:

Depreciation for Year 1 = 20% x $2,150,000 = $430,000

Book Value after Year 1 = $2,150,000 - $430,000 = $1,720,000

Depreciation for Year 2 = 32% x $2,150,000 = $688,000

Book Value after Year 2 = $1,720,000 - $688,000 = $1,032,000

Depreciation for Year 3 = 19.20% x $2,150,000 = $412,800

Book Value after Year 3 = $1,032,000 - $412,800 = $619,200

Depreciation for Year 4 = 11.52% x $2,150,000 = $248,320

Book Value after Year 4 = $619,200 - $248,320 = $370,880

Tax on Gain = 22% x ($287,000 - $370,880) = $18,889.60

Aftertax Salvage Value = $287,000 - $18,889.60 = $268,110.40