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. |

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