You invest BRL 100 million in a factory in Brazil. The factory will be depreciated at the rate of BRL 5 million per year for 20 years to a zero salvage value. You expect the factory will be worth BRL 90 million in nominal terms after four years. You plan on selling the factory in four years. The Brazilian corporate income tax rate is 40 percent. What is your expected tax liability on the sale?

Question

Quizplus · Accepted Answer

The expected tax liability on the sale is calculated based on the gain from the sale after accounting for depreciation. Over four years, the factory depreciates by BRL 5 million per year, totaling BRL 20 million. The book value after four years is BRL 80 million (BRL 100 million - BRL 20 million). Selling the factory for BRL 90 million results in a gain of BRL 10 million (BRL 90 million - BRL 80 million). The tax on this gain at a 40% rate is BRL 4 million (40% of BRL 10 million).

You Invest BRL 100 Million in a Factory in Brazil