Explanation on Business Finance Problem 8-17a

Explanation on Business Finance Problem 8-17a - asset after...

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Explanation on Business Finance Problem 8-17 Part (a) On Problem 8-17a: Use our shortcut formula for tax owed: Case 1: After three years: Tax Owed = (Sale Price - Book Value) x 0.40 Since the book value of the asset has been depreciated for three years (0.20 x 180,000, 0.32 x 180,000, and 0.19 x 180,000 give the three years of depreciation, and then subtract the total of those three years' depreciation, which is $127,800, to get the book value after three years of $52,200), we have: Tax Owed = ($10,000 - $52,200) x 0.40 Tax Owed = -$42,200 x 0.40 Tax Owed = -16,880 Since that is a negative number, you get $16,880 back from the IRS. To get the total after-tax proceeds from the sale of this asset then, you add the $10,000 you are selling it for to the $16,880 the IRS gives you back. Case 2: After 5 years: Same formula, but the book value is different because now you have depreciated for a total of five years. Put another way, you only have one year of depreciation left. The book value of the
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Unformatted text preview: asset after 5 years is $180,000 less 0.95 of that $180,000 (five years' depreciation factors add to 95%), or $180,000 less $171,000 = $9,000 book value. Tax owed = ($10,000 - $9,000) x 0.40 Tax owed = $1,000 x 0.40 Tax owed = $400 Since this is tax owed, you *subtract* it from the sale price to get the total after-tax proceeds from the sale of the asset. $10,000- $400 = $9,600 final answer for the total after-tax proceeds of sale of this new asset after 5 years. Case 3: After 7 years: Now the asset is fully depreciated (in fact it was after 6 years, since a 5-year asset class item has 6 years of depreciation, as shown on Pg. 106, your depreciation table). Tax owed = ($10,000 - $0 book value) x 0.40 Tax owed = $4,000 Since this is tax owed, you *subtract* it from the sale price to get the total after-tax proceeds from the sale of the asset. $10,000- $4000 = $6,000 final answer for the total after-tax proceeds of sale of this new asset after 7 years....
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