In an after-tax replacement study between a defender and a challenger, there may be a capital gain (CG) or loss (CL) when the defender is sold. (a) How is the gain or loss calculated, and (b) how does it affect the AW values in the study?
What will be an ideal response?
(a) For a capital loss, it is the difference between sales price and the asset’s book value.
For a capital gain, it is the difference between the sales price and the unadjusted basis (first cost) of the asset.
(b) The AW of the challenger is affected in year 0 by the capital gains tax. If it is a capital loss, the netting of losses against gains can affect AW.
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What will be an ideal response?
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