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?
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.