Royal Dutch Petro (RDP) is considering a new equipment purchase that would replace some existing equipment. The old equipment has a Book Value (BV) of $400 thousand and RDP estimates that the equipment could be sold for ONLY $150 thousand. What is the After Tax Salvage Value (ATSV) of the old equipment that RDP should use in their capital budgeting analysis? Assume the tax rate = T= 35%.
a. 0, since the sale of old equipment has nothing to do with analysis of new equipment being purchased
b. 87.5 thousand
c. 62.5 thousand
d. -250 thousand
e. 237.5 thousand
The solution explains how to calculate the after tax salvage value to be used in the capital budgeting analysis