Question

"A firm purchases a new machine for $192,000. It borrows $76,800 at 3.7% annual interest to be repaid in 2 years. The machine is depreciated using a 5-year MACRS. At the end of 3 years, the firm sells the machine for $84,000. The firm's tax rate is 33%. How much does the firm pay or save in taxes from selling this machine at the end of 3 years? In other words, what is the gains tax?
If the firm will have to pay taxes from selling this machine, enter your answer as a positive number. If the firm will save money in taxes from selling the machine, enter the answer as a negative number. "

Answer 1

Book Value (or purchase price) of the Machine = B = $ 192000

Salvage Value (or sale price) of the machine = S = $ 84000

Gain/Loss on Tax = (Salvage Value - Book Value) x Tax Rate = (84000 - 192000) x 0.33 = - $ 35640 (a negative sign implies a tax gain on sale of the machine at $ 84000 after 3 years)

Thus Tax Savings would be 33% of $ 35640 = $ 11761.20

After Tax Salvage Value = Salvage Value - Gain/Loss on Tax = 84000 - (- 35640) = $119640

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