Question 12.5: Five years ago, anticipating expansion, the XYZ Company boug...
Five years ago, anticipating expansion, the XYZ Company bought the lot next to its current factory for \$2,300,400. Over the ensuing period it modified its production system and began to make extensive use of outsourcing. Thus, despite increasing sales, it found it used less space, not more. Consequently it sold the lot and, after paying for advertising, legal fees, and commissions, realized a sum of \$3,427,958.25. If the company’s marginal tax rate is 27\%, what is the net salvage value of the land?
Capital gain = Realized value – Cost basis
= \$3,427,958.25 – \$2,300,400 = \$1,127,558.25
Capital gains tax = t × 0.5 × capital gain
= 27\% × 0.5 × \$1,127,558.25 = \$152,220.36
Net salvage value = Realized value – Capital gains tax
= \$3,427,958.25 – \$152,220.36 = \$3,275.737.89