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

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