Question

# ABC Company is considering the purchase of a new machine for \$65,000 installed. The machine will...

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.

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

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