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Chapter 10

Chapter 10 - Problem 7 Calculating Salvage Value Consider...

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Problem 7 Calculating Salvage Value Consider an asset that costs \$468,000 and is depreciated straight-line over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for \$72,000. If the relevant tax rate is 35%, what is the after-tax cash flow from the sale of this asset?

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Year % Rate Depreciation Ending Book Value 1 12.5% \$58,500 \$409,500 2 12.5% \$58,500 \$351,000 3 12.5% \$58,500 \$292,500 4 12.5% \$58,500 \$234,000 5 12.5% \$58,500 \$175,500
Ending Book Value in year 5 = \$175,500. Sell in year 5 for \$72,000 \$175,500 - \$72,000 = \$103,500 Loss \$103,500 x 35% = \$36,225 in taxes \$72,000 + \$36,225 = \$108,225 Relevant Cash Flow

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Problem 8 Calculating Salvage Value An asset used for a four-year project falls in the five- year MACRS class for tax purposes. The asset has an acquisition cost of \$8,400,000 and will be sold for \$1,750,000 at the end of the project. If the relevant tax rate is 35%, what is the after-tax salvage value of the asset.
Year % Rate Depreciation Ending Book Value 1 20% \$1,680,000 \$6,720,000

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