Question

Your firm needs a computerized machine tool lathe which costs $54,000 and requires $12,400 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35 percent and a discount rate of 11 percent. If the lathe can be sold for $5,400 at the end of year 3, what is the after-tax salvage value?

Answer 1

Answer:

$2467.49

Explanation:

As we know that MACRS 3-year class life category is: 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent

We need to find the book value of the machine tool lathe, which is 3 years from now:

Book value = 54,000 - 54,000*33.33% - 54,000*44.44%  -  54,000*14.82 %

= $4,001.4

The tax will be based on the profit you have from selling the machine, so:

• The profit = 12,400 - 4,001.4  = $8398.6

Therefore, our taxes are: $8398.6*0.35 = $2932.51

So, the after tax salvage value of the machine is the money you received on the sale minus the taxes you have to pay, that is:

• After tax- Salvage Value = $5,400 - $2932.51= $2467.49

Hope it will find you well.

Answer 2

Answer:

The salvage value after tax is  $4910.49

Explanation:

Given Data;

Cost value = $54,000

MACRS = 3-year class life category

Cost of maintenance = $12,400

Tax rate = 35%

Discount rate =11%

Sales value = $5,400

after-tax salvage value =?

The MACRS class depreciation rate for 3 years is;

33.33% 44.44% 14.82% and 7.41%

Total depreciation rate = 33.33% +44.45% +14.81%

                                      =92.59%

Therefore remaining book value = 100%-92.59%

                                                       =7.41%

The book value of asset after 3 years = cost of asset *remaining book value

                                                                   $54,000 * 7.41%

                                                                   $54,000 *0.0741

                                                                   $4001.4

The profit gain  = Sales value - book value after 3 years

The profit gain   =$ 5400 -4001.4

                            = $1398.6

From the question a tax rate of 35% was paid

Therefore Tax on profit = profit gain *35%

                                        =  $1398.6 *0.35

                                        = $489.51

The salvage value after tax= salvage value - tax on profit

                                             = $5400 - $489.51

                                             =$4910.49