Question

Your firm needs a computerized machine tool lathe which costs $50,000 and requires $12,000 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, and neither bonus depreciation nor Section 179 expensing can be used. Assume a tax rate of 21 percent and a discount rate of 12 percent.

If the lathe can be sold for $5,000 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.)

Answer 1

Ans. After tax salvage value = $4546.75

Detailed solution

The three year asset class in the Modified Accelerated Cost Recovery System (MACRS) is used for example for some machines and tools used in the plastics and metals industries.

According to 3-year class MACRS depreciation, the total depreciation allowed over 3 years will be 92.59% of cost, then it will be 7.41% as the Net Book Value when the project is completed, i.e. $3705. (7.41%*50000)

If proceeds from its sale are $5000, then book gain will be $1295($5000-$3705) and tax at 35% will be $453.25. The net proceeds from the sale will be $5000 minus tax of $453.25, makes a net after tax value of $4546.75