Consider a project with an initial asset cost of $168,000 with depreciation of that asset set as straight-line to zero over seven years. Ignore bonus depreciation. At the end of the project's four-year life the asset can be sold for $65,000. Use a combined federal and state tax rate of 24 percent. What is the aftertax salvage value?
A) $62,550
B) $65,500
C) $66,050
D) $68,100
E) $66,680

Question

Quizplus · Accepted Answer

The aftertax salvage value is calculated by considering the tax impact of the sale of the asset. First, calculate the annual depreciation: $168,000 / 7 years = $24,000 per year. Over four years, the total depreciation is $24,000 * 4 = $96,000. The book value of the asset after four years is $168,000 - $96,000 = $72,000. Selling the asset for $65,000 results in a loss of $72,000 - $65,000 = $7,000. This loss reduces the taxable income, leading to a tax shield of $7,000 * 24% = $1,680. Therefore, the aftertax salvage value is the sale price plus the tax shield: $65,000 + $1,680 = $66,680.

Consider a Project with an Initial Asset Cost of $168,000