Question 12.7: The XYZ Company also had a 1973 Aston Martin sedan in mint c...
The XYZ Company also had a 1973 Aston Martin sedan in mint condition that it had been storing in a shed on the land. The car had been bought in 1973 by the company’s founder, who, unfortunately, was stricken with gout and could not drive it. Thus it had remained parked for the last 39 years and was depreciated on the books from its original purchase price of \$32,000 at a CCA rate of 30\%. Since the founder was dead, the current board felt they could safely sell the car and did so at a public auction. It was bought by an eccentric car collector for \$225,000. If the company’s marginal tax rate is 26.5\%, what is the net salvage value (NSV) of the Aston Martin?
Use equation 11-8 to calculate the current book value (UCC) of the car:
PW = S\left( 1-\frac{td}{i+d} \right) (12-8)
B_{39}=UCC_{39}=\$32,000\left( 1-0.3/2 \right)\left( 1-0.3 \right)^{39-1}=\$0.04\approx \$0
Tax on recapture = t×\left( B_{39}-Cost basis \right)
=26.5\%×\left( \$0.0-\$32,000 \right)=-\$8,480
Capital gains tax = t×0.5×(Realized value – Cost basis)
=26.5\%×0.5×(\$225,000 – \$32,000) = \$25,572
DTE = Tax on recapture + Capital gains tax
= -\$8,480 + -\$25,572 = -\$34,052
NSV=S+DTE
= \$225,000 – \$34,052 = \$190,948
All the variants can be easily accommodated in an Excel worksheet.