   Chapter 12, Problem 3P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

AFTER-TAX SALVAGE VALUE Kennedy Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Kennedy can sell the used equipment today for$5 million, and its tax rate is 40%. What is the equipment’s after-tax salvage value?

Summary Introduction

To compute: The after tax salvages value of equipment.

Salvage Value:

Salvage value is the resale value that is estimated by the management as the amount to be realized at the end of useful life of an asset. While calculating the depreciation of a project, this is important variant in the calculation.

Explanation

Given,

Original cost of equipment is $20 million. 80% of the value is depreciated. Market value is$5 million.

Tax rate is 40%.

Formula to calculate after tax salvage value is,

After tax salvage value=[Book value of equipment+[(Market valueBook value)×(1Tax rate)]]

Substitute $12 million for book value,$5 million for market value and 40% for tax rate.

After tax salvage value=$12million+[($5million$12million)×(10.40)]=$12million+[\$7million×(0

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