Consider an asset that costs 387200 and is depreciated strai

Consider an asset that costs $387,200 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 3-year project; at the end of the project, the asset can be sold for $48,400. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

Solution

Computation of after tax cash flow from sale of asset:

Cost of asset = $3,87,200

Life = 9 years

Annual depreciation = $43,022 ($3,87,200/9)

Book value of asset at the end of year 3 = Cost of asset - Accumulated depreciation upto year 3

= $3,87,200 - ($43,022 * 3)

= $3,87,200 - $1,29,067

= $2,58,133

After tax cash flow from sale = Salvage value + Tax saving on loss on sale

= $48,400 + ($2,58,133 - $48,400)*35%

= $48,400 + $73,406

= $1,21,806