Solved Question: Allen Air Lines must liquidate some equipment that is being replaced

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Question:

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $23 million, of which 80% has been depreciated. The used equipment can be sold today for $5.75 million, and its tax rate is 35%. What is the equipment’s after-tax net salvage value?

Answer:

Book value as on date of sales=$23million(1-0.8)=$4.6million

Hence gain on sale=(5.75-4.6)=$1.15million

Hence after-tax net salvage value=Sale proceeds-(Tax rate*Gain on Sales)

=5.75-(0.35*1.15)

which is equal to

=$5,347,500.

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