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A company purchased an equipment worth $250,000. It will be depreciated using the straight-line depreciation over 8 years. Assume a tax rate of 20%.

Comment: This is the easiest depreciation method... one percent per year.

What is the book value of this asset at the end of years 1-8?
What is the depreciation expense in each of the years 1-8?
If the equipment can be sold for $5,000 at then end of Year 5, what is the after-tax salvage value?
If the equipment can be sold for $80,000 at then end of Year 5, what is the after-tax salvage value?

Show work step-by-step using excel

pur-new-sol

1&2)

19538701

19538705

3) Computation of After-tax Salvage Value if the Equipment can be sold for $5,000:

Gain or Loss on Sale of Equipment = Sales Value of Equipment - Book Value of Equipment at the End of Year 5

= $5,000 - $93,750

= - $88,750

So, there is a loss of $88,750.

Tax on Loss = -$88,750*20% = -$17,750

So,

After-tax Salvage Value = Sales Value of Equipment - Tax on Loss

= $5,000 - (-$17,750)

= $5,000 + $17,750

After-tax Salvage Value = $22,750

4) Computation of After-tax Salvage Value if the Equipment can be sold for $80,000:

Gain or Loss on Sale of Equipment = Sales Value of Equipment - Book Value of Equipment at the End of Year 5

= $80,000 - $93,750

= - $13,750

So, there is a loss of $13,750.

Tax on Loss = -$13,750*20% = -$2,750

So,

After-tax Salvage Value = Sales Value of Equipment - Tax on Loss

= $80,000 - (-$2,750)

= $80,000 + $2,750

After-tax Salvage Value = $82,750