Problem 88 Calculating Salvage Value An asset used in a four

Problem 8-8 Calculating Salvage Value

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,120,000 and will be sold for $1,320,000 at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset? Refer to Table 8.3. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)
  
Aftertax salvage value           $

Solution

Answer:

Book Value at the end of 5 years as per MACRS class = 5.76%
Book Value at the end of 5 years = $6,120,000 * 5.76%
Book Value at the end of 5 years = $352,512

After Tax Salvage Value = SV – [(SV – BV) * Tax Rate]
After Tax Salvage Value = $1,320,000 – [($1,320,000 - $352,512) * 0.34]
After Tax Salvage Value = $1,320,000 – [$967,488 * 0.34]
After Tax Salvage Value = $1,320,000 - $328,945.92
After Tax Salvage Value = $991,054.08