Liberty Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale. a. $5,558b. $5,850c. $6,143d. $6,450e. $6,772

b. $5,850

Explanation:

For computing the after-tax salvage value, we need to do the following calculations:

1. Determine the book value:

= (Original cost of equipment) - (original cost of equipment * depreciation percentage)

= ($22,500) - ($22,500 * 75%)

= $22,500 - $16,875

= $5,625

2. Determine the profit or loss on sale of equipment:

Profit = Sale value - Book value

= $6,000 - $5,625

= $375

3. Determine the tax on profit on sale of equipment:

= Profit * tax rate

= $375 * 40%

= $150

4. Now finally calculation of the after-tax salvage value is shown below:

= Salvage value - profit tax

= $6,000 - $150

= $5,850