Question

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,020,000 and will be sold for $1,220,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset

Answer 1

The after-tax salvage value of the asset is:

= $793,000.

Step-by-step explanation:

a) Data and Calculations:

Asset acquisition cost = $6,020,000

Salvage value = $1,220,000

MACRS Depreciation Expenses = $4,800,000

Project useful life or project duration = 5 years

Tax rate = 35%

Tax expense = $427,000

After-tax salvage value = $793,000 ($1,220,000 - $427,000)

b) The salvage value of the project asset is the recovery or residual value after depreciation expenses have been recognized over the project asset's useful life. Depreciation is an accounting method of spreading the cost of an asset over its useful life. There are many depreciation methods, including straight-line, double-declining, unit-of-production, sum-of-the-years digits, etc.