Question

1. Marco and his family have owned and operated a successful winery for three generations.   However, Marco has decided to expand the family’s business to include a line of sparkling wine the family has never made before.   To make this sparkling wine, Marco needs to purchase new equipment to handle the carbonation in sparkling wine that standard wine equipment is unable to deal with.   To purchase a new fermentation tank and bottling machine, Marco needs to spend approximately $55,000. The real terminal value after four years is $30,000, the inflation rate is 2.75% and the marginal tax rate is 22%. Assuming straight line depreciation over 7 years, what is the after-tax terminal value?

   		$31,336.90
   		$31,267.85
   		$34,375
   		$25,857.77

Answer 1

Sale Value in four years = Real sale Value * (1+Inflation rate)^4

= $30,000 * (1+2.75%)^4

= $30,000 * 1.11462126

= $33,438.6378

Book value at the end of 4 years = Machine cost * 3 years / 7 years

= $55,000 * 3 / 7

= $23,571.4286

Tax on sale = (Sale value - Book Value) * tax rate

= ($33,438.6378 - $23,571.4286) * 22%

= $9,867.2092 * 2%

= $2,170.7860

After tax sale Value = Sale Value - Tax on sale

= $33,438.2092 - $2,170.7860

= $31,267.8518

Therefore, after tax sale value is $31,267.85