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?

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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?