calculating salvage value

Calculating salvage value – an asset used in a four year project falls in the five – year MACRS class for tax purposes. The asset has an acquisition cost of $8,400,000 and will be sold for $1,900,000 at the end of the project. If the tax rate is 35 percent, what is the after tax salvage value of the asset?

To find the BV at the end of four years, we need to find the accumulated depreciation for the first four years. We could calculate a table with the depreciation each year, but an easier way is to add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost.

Doing so , we get:
BV4 = $8,400,000 – $8,400,000(0.2000+0.3200+0.1920+0.1150)
BV4  = $1,453,200  

The asset is sold at a gain to book value , so this gain is taxable.
After tax salvage value  = $1,900,000 + (1,453,200 -1,900,000)(0.35)
After tax salvage value is: $1,743,620.

Reference: Corporate Finance Book, Stephen A.Ross, Randolph W.Westerfield and Jeffrey Jaffe, Ninth Edition. Chapter 5, questions number 8, page 196.

Comments

CiaraPen said…
Thank-you! This was very helpful!