Question

Russell's is considering purchasing $697,400 of equipment for a four-year project. The equipment falls in the five-year MACRS class with annual percentages of .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. At the end of the project the equipment can be sold for an estimated $135,000. The required return is 13.2 percent and the tax rate is 23 percent. What is the amount of the aftertax salvage value of the equipment assuming no bonus depreciation is taken?A. $136.666.67B. $118,804.30C. $140,071.25D. $143,001.29E. $131667.47

Answer 1

Answer:

E. $131667.47

Explanation:

For computing the after-tax salvage value , we need to do the following calculations:

1. Determine the book value:

= (Original cost of equipment) - (original cost of equipment × depreciation percentage for four years)

= ($697,400) - ($697,400 × 82.72%)

= $697,400 - $576,889.28

= $120,510.72

2. Determine the profit or loss on sale of equipment:

Profit = Sale value - Book value

= $135,000 - $120,510.72

= $14,489.28

3. Determine the tax on profit on sale of equipment:

= Profit × tax rate

= $14,489.28  × 23%

= $3,332.53

4. Now finally calculation of the after-tax salvage value is shown below:

= Salvage value - profit tax

= $135,000 - $3,332.53

= $131667.47