Unformatted text preview: t manufacturing equipment has a 7-year
recovery period, as noted in Table 3.1. Using this recovery period results in 8 years of depreciation, which unnecessarily complicates examples and problems. To simplify, manufacturing equipment is treated as a 5-year asset in this
and the following chapters. CHAPTER 8 Capital Budgeting Cash Flows 367 asset may be sold (1) for more than its initial purchase price, (2) for more than its
book value but less than its initial purchase price, (3) for its book value, or (4) for
less than its book value. An example will illustrate.
EXAMPLE recaptured depreciation
The portion of an assetâ€™s sale
price that is above its book
value and below its initial
purchase price. The old asset purchased 2 years ago for $100,000 by Hudson Industries has a
current book value of $48,000. What will happen if the firm now decides to sell
the asset and replace it? The tax consequences depend on the sale price. Figure
8.5 on page 368 depicts the taxable income resulting from four possible sale
prices in light of the assetâ€...
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