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?
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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