Question

# Marshall-Miller & Company is considering the purchase of a new machine for \$50,000, installed. The machine...

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

 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

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