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 $7,096,730.00 and will be sold for $1,726,657.00 at the end of the project (End of the 4th year). If the tax rate is 37.00%, what is the after-tax salvage value of the asset

$1,551,537.28

Explanation:

The Modified Accelerated Cost Recovery System or (MACRS) is the current tax depreciation system in the United States.

Annual depreciation rates are provided under different classes. I have attached it to this answer.

Using MACRS depreciation, 5 year class, the total depreciation allowed through 4 years will be an addition of the first 4 years so far in this manner,

= 20% + 32% + 19.2% + 11.52%

= 82.72% of cost at the fourth year

This leaves 17.28%( 1 - 82.72%) as percentage of the Net Book Value when the project is completed in 4 years.

So, value left,

= 17.28% x $7,096,730

= $1,226,314.94

Since it will be sold at $1,726,657, the gain would be,

= 1,726,657 - 1,226,314.94

= $500,342.06

At 35% tax

= 0.35 x 500,342.06

= $175,119.72

Now we subtract this amount from sales proceeds to get,

= 1,726,657 - 175,119.72

= $1,551,537.28

$1,551,537.28 is the after tax salvage value.

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