Question

# You are calculating the SV at Time 10 for a replacement project. The new machine will...

You are calculating the SV at Time 10 for a replacement project. The new machine will be depreciated using MACRS for a 5-year asset class, and its expected salvage value at Time 10 is \$8,000. The old machine is being depreciated on a straight-line basis to an expected salvage value at Time 10 of \$2,000. Net working capital investments totaling \$1,000 were made over the life of the project. Additional tax-deductible shutdown expenses of \$500 are necessary at Time 10. If the tax rate is 30%, what is the value of SV at Time 10?

After tax sale value of old machine = Sale value - [(Sale value - book value)* tax rate]

= \$2,000 - [(\$2,000 - \$2,000)*30%]

= \$2,000

After tax sale value of New Machine = Sale value - [(Sale value - book value)* tax rate]

= \$8,000 - [(\$8,000 - \$0) * 30%]

= \$8,000 - \$2,400

= \$5,600

Net Working Capital Recoverd = \$1,000

After tax Shutdown expenses = \$500 * (1-30%) = \$350

Salvage Value at time 10 = Sale Value of New Machine + Net Working Capital Recovered - Sale Value of Old Machine - After tax Shutdown expenses

= \$5,600 + \$1,000 - \$2,000 - \$350

= \$4,250

Therefore, Salvage Value at time 10 is \$4,250