Question

Pre-Fab purchased some equipment two years ago for $287,600. These assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576, for Years 1 to 6, respectively. The company is currently replacing this equipment so the old equipment is being sold for $150,000. What is the aftertax salvage value from this sale if the tax rate is 21 percent and no bonus depreciation is claimed?

Answer 1

Answer :

Net salvage value = $147,490

Explanation :

As per the data given in the question,

Cost of equipment = $287,600

Expire time = 2 years

Depreciation rate for first 2 years = 0.20, 0.32

Based on the above information, we need to do following calculations which are shown below:

Total accumulated depreciation of equipment = Cost  × Accumulated depreciation rate

= $287,600 × (0.20 + 0.32)

= $149,552

Book value of equipment at the end of 2 years = Cost - Accumulated Depreciation of equipment

= $287,600 - $149,552

= $138,048

Selling price = $150,000

Capital gain on sale = Selling price - Book value

= $150,000 - $138,048

= $11,952

And Tax rate = 21%

So

Capital gain tax is

= $11,952 × 21%

= $2,509.92

= $2,510

Net salvage value = Selling price - Capital gain tax

= $150,000 - $2,510

= $147,490