Question

Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

Year Depreciation Rate

1 0.2

2 0.32

3 0.19

4 0.12

5 0.11

6 0.06

Answer 1

year	beginning value	depreciation	ending value
1	$50,000	(50,000*0.20)=>$10,000	($50,000-10,000)=>$40,000
2	$40,000	(50,000*0.32)=>$16,000	($40,000-16,000)=>$24,000
3	$24,000	(50,000*0.19)=>9,500	($24,000-9,500)=>$14,500
4	$14,500	(50,000*0.12)=>$6,000	($14,500-6,000)=>$8,500

now,

calculation of after tax salvage value;

sale value	$12,500
less; book value at end of year 4	8,500
capital gain on sale	4,000
less; tax on gain ($4,000*40%)`	(1,600)
after tax capital gain	2,400
after tax salvage value (sale value - tax on gain) ($12,500-1,600)	$10,900