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22 December, 13:11

Liberty Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale. a. $5,558b. $5,850c. $6,143d. $6,450e. $6,772

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  1. 22 December, 13:20
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    b. $5,850

    Explanation:

    For computing the after-tax salvage value, we need to do the following calculations:

    1. Determine the book value:

    = (Original cost of equipment) - (original cost of equipment * depreciation percentage)

    = ($22,500) - ($22,500 * 75%)

    = $22,500 - $16,875

    = $5,625

    2. Determine the profit or loss on sale of equipment:

    Profit = Sale value - Book value

    = $6,000 - $5,625

    = $375

    3. Determine the tax on profit on sale of equipment:

    = Profit * tax rate

    = $375 * 40%

    = $150

    4. Now finally calculation of the after-tax salvage value is shown below:

    = Salvage value - profit tax

    = $6,000 - $150

    = $5,850
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