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 $5,100,000 and will be sold for $1,600,000 at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset

$1,449,068.8

Explanation:

Given the information from the question and using MACRS (Modified Accelerated Cost Recovery System) table of the United States we have

Original Investment = $5,100,000

Useful Life = 4 years

Depreciation Year 1 = 20.00% * $5,100,000

Depreciation Year 1 = $1,020,000

Depreciation Year 2 = 32.00% * $5,100,000

Depreciation Year 2 = $1,632,000

Depreciation Year 3 = 19.20% * $5,100,000

Depreciation Year 3 = $979,200

Depreciation Year 4 = 11.52% * $5,100,000

Depreciation Year 4 = $587,520

Book Value at the end of Year 4 = $5,100,000 - $1,020,000 - $1,632,000 - $979,200 - $587,520

Book Value at the end of Year 4 = $881,280

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate

After-tax Salvage Value = $1,600,000 - ($1,600,000 - $881,280) * 0.21

After-tax Salvage Value = $1,600,000 - $150,931.20

After-tax Salvage Value = $1,449,068.8

Hence, the after-tax salvage value is $1,449,068.8

answer; tech (a) is correct;