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 $12,250. 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

Initial Investment = $65,000
Useful Life = 4 years

Depreciation Year 1 = 20.00% * $65,000
Depreciation Year 1 = $13,000

Depreciation Year 2 = 32.00% * $65,000
Depreciation Year 2 = $20,800

Depreciation Year 3 = 19.20% * $65,000
Depreciation Year 3 = $12,480

Depreciation Year 4 = 11.52% * $65,000
Depreciation Year 4 = $7,488

Book Value at the end of Year 4 = $65,000 - $13,000 - $20,800 - $12,480 - $7,488
Book Value at the end of Year 4 = $11,232

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $12,250 - ($12,250 - $11,232) * 0.25
After-tax Salvage Value = $12,250 - $254.50
After-tax Salvage Value = $11,995.50