Question

A company is considering a 5-year project to expand production with the purchase of a new automated machine using the latest technology. The new machine would cost $220,000 FOB St. Louis, with a shipping cost of $4,000 to the plant location. Installation expenses of $10,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $48,000 at the end of the project. If the corporate tax rate is 28%, what is the after tax salvage cash flow for this new machine at the end of the project? (Answer to the nearest dollar.)

MACRS percentages for depreciation each year are as follows:

   Year      %

     1     14.29
     2     24.49
     3     17.49
     4     12.49
     5      8.93
     6      8.93
     7      8.93
     8      4.45

Answer 1

Answer :

Cost price	$ 220,000
Add: Shipping cost	$ 4,000
Add: Installation expenses	$ 10,000
Depreciable cost capitalized	$ 234,000
Less: Depreciation for 5 years [ $ 234,000 * ( 14.29% + 24.49% + 17.49% + 12.49% + 8.93% )	( $ 181,795 )
Book value at the end of 5 years	$ 52,205
Sale value at the end of 5 years	$ 48,000
Loss on sale of machine in year 5 ( $ 52,205 - $ 48,000 )	$ 4,205

It is considered as loss because sale value is less than book value .When a firm suffers loss on sale of machine,it can enjoy tax credit on such loss.Therefore , tax credit amount shall be added to salvage value to calculate after-tax salvage value.

Sale value at the end of 5 years = $ 48,000

Add: Tax credit on loss of sale = $ 1,177 ( $ 4,205 * 28% )

After-tax salvage value in year 5 = $ 49,177.