Question

Depreciation Tax Shield Your firm needs a computerized machine tool lathe that costs $50,000 and requires...

Depreciation Tax Shield Your firm needs a computerized machine tool lathe that costs $50,000 and requires $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-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. Calculate the depreciation tax shield for this project in year 3

After-Tax Cash Flow from Sale of Assets If the lathe in the previous problem can be sold for $5,000 at the end of year 3, what is the after-tax salvage value?

Homework Answers

Answer #1
1] Depreciation tax shield for year 3 = 50000*14.81%*21% = $        1,555.05
2] Book value at EOY 3 = 50000*7.41% = $        3,705.00
Sale value $        5,000.00
Gain on sale = 5000-3705 = $        1,295.00
Tax on gain at 21% = 1295*21% = $ 271.95
After tax salvage value = 5000-271.95 = $        4,728.05
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