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 |

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