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An asset that costs $5,000 will be depreciated straight-line to zero over its five-     year tax life....

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Finance

An asset that costs $5,000 will be depreciatedstraight-line to zero over its five-

    year tax life. The asset is tobe used in a three-year project. At the end of the

    third year, the asset will besold for $1,200. If the relevant tax rate is 34%, whatis

    the salvage value of thisasset?

Answer & Explanation Solved by verified expert
3.7 Ratings (371 Votes)

Sale value of asset $       1,200
Book value of asset $       2,000
Loss on sale $         -800
Tax saving on loss $         -272
After tax salvage value $       1,472
Working:
# 1 Straight line deprciation = (Cost - Salvage value)/Useful Life
= (5000-0)/5
= $       1,000
# 2 Acumulated depreciation for 3 years = $       1,000 * 3
= $       3,000
# 3 Cost $       5,000
Less accumulated depreciation $       3,000
Book Value $       2,000
# 4 Tax saving on loss = $         -800 * 34%
= $         -272

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Transcribed Image Text

An asset that costs $5,000 will be depreciatedstraight-line to zero over its five-    year tax life. The asset is tobe used in a three-year project. At the end of the    third year, the asset will besold for $1,200. If the relevant tax rate is 34%, whatis    the salvage value of thisasset?

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