Question

ABC Company is considering the purchase of a new machine for $65,000 installed. The machine will be depreciated by MACRS as 5 year property. The firm expects to operate the machine for 4 years and then to sell it for $12,750. If the marginal tax rate is 25.00%, what will the after–tax salvage value be when the machine is sold at the end of Year 4? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

To find the BV at the end of four years, we need to find the accumulated depreciation for the first four years. Add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost. Doing so, we get:

BV4 = $65,000 − $65,000(0.2000 + 0.3200 + 0.1920 + 0.1152)

BV4 = $11,232

Aftertax salvage value = $12,750 + ($11,232 − $12,750)(0.25)

Aftertax salvage value = $12,370.50