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. Let's start with depreciation (2 options): Straight-line depreciation Annual Depreciation Installed Cost - Estimated Salvage Value Estimated Economic Life Example: A company purchases a machine for $12,000 and it has an estimated salvage value of $2000 at the end of a 5-year economic life, the annual depreciation amount is: Annual depreciation | IF An asset has a depreciable base of $100,000, no expected salvage value, and an estimated economic life of 10 years. The firm has earnings before depreciation and taxes (EBDT) of $80,000 and a tax rate of 40%. Show net income (earnings after taxes). Annual Depreciation - 100,000/10 = 10,000$ For Each Year: EBDT 80,000 $ -Dep. 10,000 EBT 70,000 -Taxes 28,000 EAT 42,000 S Same asset using MACRS: I Double-click to show white s Year ! 2 3 5-7 8 9-10 EBDT $80,000 $80,000 $80,000 580,000 SR0,000 $80.000 $80,000 -Dep 14,290 19,592 13,992 9,992 21.432 3,568 EBT 65,710 60408 66008 70,008 58,568 76,432 Tax 26,284 24,163.2 26,403,2 280032 23.427 30,572.8 EAT $39,426 536,244 $39,604.8 $42004.8 $351408 $45,859.2 s Next topic, Book Value (BV): BV - Installed Cost of Asset - Accumulated Depreciation Example: What is the book value of an asset at the end of year 3 if it originally cost $100,000 and is being depreciated using MACRS for a 7-year class? BV-$ S $ Selling An Asset for Its Book Value: Example An asset has a book value of $50,000. You have an opportunity to sell the asset for $50,000. What would be the tax effect? Answer: Selling An Asset For Less Than Its Book Value: Example: The asset has a BV of $50,000. You are able to sell the asset for $20,000 Loss - Selling Price - BV $ What would be the tax effect? Answer: What are the net proceeds from the sale? $ Selling An Asset For More Than Its Book Value: Selling An Asset For More Than Its Book Value: Example: The asset has a BV of $50,000. You are able to sell the asset for $60,000. Gain - Selling Price - BV $ What would be the tax effect? Answer: Tax liability - 5 =$ What are the net proceeds from the sale