Question

Vector Corporation purchased a machine seven years ago at a cost of $840,000. The machine is being depreciated using the straight-line method over ten years. The tax rate is 25 percent and the discount rate is 8 percent. If the machine is sold today for $305,000, what will the aftertax salvage value be?

		$349,300
		$276,400
		$337,210
		$303,420
		$291,750

Answer 1

Solution:
	Answer is 5th option $291,750
Working Notes:
	After-tax salvage value = sale value + (book value -sale value) x tax rate
	Sale value =$305,000
	Book value = cost -depreciation upto date of sale
	Book value = Cost -((cost /life) x no of period expired)
	Book value = $840,000 -(($840,000 /10) x 7)
	Book value = $840,000 -$588,000
	Book value = $252,000
	Tax rate = 25%
	After-tax salvage value = sale value + (book value -sale value) x tax rate
	After-tax salvage value = $305,000 + ($252,000 -$305,000) x 25%
	After-tax salvage value = $305,000 + (-$53,000) x 25%
	After-tax salvage value = $305,000 + (-13250)
	After-tax salvage value = $291,750
Please feel free to ask if anything about above solution in comment section of the question.