Eyring Industries has a truck purchased seven years ago at a cost of $6,000. At the time of purchase, the ultimate salvage value was estimated at $500, but salvage value was ignored in depreciation deductions. The truck is now fully depreciated. Assuming a tax rate of 40%, if the truck is sold for $500, the after-tax cash inflow for capital budgeting purposes will be:

Question

Quizplus · Accepted Answer

The after-tax cash inflow is the selling price minus the capital gain tax. The capital gain is the selling price minus the depreciated value, which is $0 since the truck is fully depreciated. Therefore, the capital gain is $500. The capital gain tax is 40% of $500, which is $200. Therefore, the after-tax cash inflow is $500 - $200 = $300.

Eyring Industries Has a Truck Purchased Seven Years Ago at a Cost