Hi Professor,
I have a question regarding the calculation of the salvage value and tax on capital gain in Exercise Set 6: Valuation – Task 1 (Ecoglass project).
At the end of the project (Year 4), the machines are sold for 60,000€. Given that:
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Total CAPEX = 200,000€
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Depreciation = 20,000€/year (straight-line)
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Only 3 years of depreciation occur during the project
This would result in a book value of 140,000€ by the end of Year 4:
200,000€−(3×20,000€)=140,000€Since the sale price (60,000€) is less than the book value, this would imply a capital loss, and therefore, I would expect no tax on sale.
However, in the solution provided, there is a tax of 24,000€ applied in the final year.
Does this mean that we are actually considering the capital loss of 80,000€ (i.e., 140,000€ book value − 60,000€ sale price), and therefore generating a tax saving of 24,000€ (80,000€ × 30%)?
And if so, is this tax benefit what is being included in the final Free Cash Flow in Year 4?
Just trying to understand whether the 24k is a tax payment on a gain, or actually a tax shield due to a loss.
Thanks in advance!
Frederik