Kasper Film Co.is selling off some old equipment it no longer needs because its associated project has come to an end.The equipment originally cost $22,500, of which 75% has been depreciated.The firm can sell the used equipment today for $6,000, and its tax rate is 25%.What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

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Quizplus · Accepted Answer

The equipment's original cost is $22,500, and 75% of this amount has been depreciated, leaving a book value of $5,625 ($22,500 * 25%). Selling the equipment for $6,000 results in a gain of $375 ($6,000 - $5,625). The tax on this gain is $93.75 ($375 * 25%). Therefore, the after-tax salvage value is $5,906.25 ($6,000 - $93.75).