A proposed new investment has projected sales of $833,000. Variable costs are 54 percent of sales, and fixed costs are $187,280; depreciation is $95,000. Assume a tax rate of 40 percent.  ...

A proposed new investment has projected sales of $833,000. Variable costs are 54 percent of sales, and fixed costs are $187,280; depreciation is $95,000. Assume a tax rate of 40 percent.

 

After-tax salvage value?

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pnrjulius eNotes educator| Certified Educator

The salvage value of an asset is the amount of money an asset is predicted to sell for at the end of its useful life. Essentially the before-tax salvage value is just the cost of the asset minus the depreciation; the after-tax salvage value is what's left of that amount after applicable taxes are removed.

The variable costs are not part of the value of the asset---they are involved in the costs of production, but not in the asset itself. Therefore they are a red herring; we can disregard them for purposes of calculating salvage value. Likewise, sales are irrelevant for this calculation. All we care about are fixed costs, depreciation, and taxes.

The after-tax salvage value is the fixed cost, minus depreciation, then with taxes taken out:

($187,280 - $95,000)*(1-0.40) = $55,368

We also don't care about which accounting basis the depreciation is figured in, because we were simply given the value of total depreciation.

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