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Homework answers / question archive / Liberty Services is now at the end of the final year of a project

Liberty Services is now at the end of the final year of a project

Finance

Liberty Services is now at the end of the final year of a project. The equipment originally cost $12,114, of which 66% has been depreciated. The firm can sell the used equipment today for $6,329, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis?

 

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Computation of Equipment's After-tax Salvage Value:

Book Value as on date of Sale = Cost-Accumulated Depreciation

= $12,114*(1-0.66)

= $4,118.76

 

Hence,

Gain on Sale = $6,329 - $4,118.76 = $2,210.24

After-tax Salvage Value = Sale Proceeds-(Gain on Sale*Tax rate)

= $6,329 - ($2,210.24*0.40)

= $6,329 - $884.10

After-tax Salvage Value = $5,444.90

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