Question

Your firm needs a computerized machine tool lathe which costs $53,000 and requires $12,300 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 12 percent. If the lathe can be sold for $5,300 at the end of year 3, what is the after-tax salvage value?

Answer 1

Cost of Lathe = $53,000

Depreciation Expense, Year 1 = 33.33% * $53,000
Depreciation Expense, Year 1 = $17,664.90

Depreciation Expense, Year 2 = 44.45% * $53,000
Depreciation Expense, Year 2 = $23,558.50

Depreciation Expense, Year 3 = 14.81% * $53,000
Depreciation Expense, Year 3 = $7,849.30

Book Value at the end of Year 3 = $53,000 - $17,664.90 - $23,558.50 - $7,849.30
Book Value at the end of Year 3 = $3,927.30

Salvage Value = $5,300

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $5,300 - ($5,300 - $3,927.30) * 0.34
After-tax Salvage Value = $5,300 - $466.72
After-tax Salvage Value = $4,833.28