Liberty Services is now at the end of the final year of a project.The equipment was purchased prior to the new tax law and originally cost $20,000,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 that will offset income from the company's other projects.
A) $5,750
B) $5,060
C) $5,335
D) $4,180
E) $6,380

Question

Quizplus · Accepted Answer

The after-tax salvage value is the market value of the equipment minus the tax on the gain from the sale. The gain from the sale is the market value minus the book value. The book value is the original cost minus the accumulated depreciation. The accumulated depreciation is 75% of the original cost, or $15,000. Therefore, the book value is $20,000 - $15,000 = $5,000. The gain from the sale is $6,000 - $5,000 = $1,000. The tax on the gain is $1,000 x 25% = $250. Therefore, the after-tax salvage value is $6,000 - $250 = $5,750.

Liberty Services Is Now at the End of the Final