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Power Manufacturing has equipment that it purchased 5 years ago for $2,450,000
Power Manufacturing has equipment that it purchased 5 years ago for $2,450,000. The equipment was used for a project that was intended to last for 7 years. However, due to low demand, the project is being shut down. The equipment was depreciated using the straight-line method and can be sold for $380,000 today. The company's tax rate is 34 percent. What is the aftertax salvage value of the equipment?
Expert Solution
Computation of the after tax salvage value:-
Depreciation = (Cost - Salvage value) / Estimated useful life
= ($2,450,000 - $0) / 7
= $350,000
Book value as on date of sale = Cost - Accumulated depreciation
= $2,450,000 - ($350,000 * 5)
= $2,450,000 - $1,750,000
= $700,000
Loss on sale = Book value - Sale proceeds
= $700,000 - $380,000
= $320,000
After tax salvage value = Sale proceeds + (Loss on sale * tax rate)
= $380,000 + ($320,000 * 34%)
= $380,000 + $108,800
= $488,800
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