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 $180,000 FOB St. Louis, with a shipping cost of $7,000 to the plant location. Installation expenses of $14,000 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 $41,000 at the end of the project. If the corporate tax rate is 38%, 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 THE CORRECT ANSWER IS 42,460. Please break answer down in its entirety. Thank you!

Answer 1

Capitalised Cost of machine = $1,80,000+ $7,000+ $14,000 = $2,01,000

Year	Depreciation Rate	Depreciation $
1	0.1429	28722.9
2	0.2449	49224.9
3	0.1749	35154.9
4	0.1249	25104.9
5	0.0893	17949.3
	Total	156156.9

So book value at the end of project i.e.5th year = $201000- $156156.9 = $44843.1

Loss on sale = $41000 - $44843.1 = $3843.1

Tax saving on loss on sale of machine= $3843.1 * 0.38 = $1460.38

Therefore after tax salvage cash flow = $41000+ $1460.38 = $42460.38 or $42460.