Question

Your firm needs a computerized machine tool lathe which costs $45,000 and requires $5,500 in maintenance expense 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 25 percent and a discount rate of 12 percent. If the lathe can be sold for $6,300 at the end of year 3, what is the after-tax salvage value? The MACRS rates are 33.33% for year 1; 44.45% for year 2; 14.81% for year 3; and 7.41% for year 4

Answer 1

Cost of asset. 45000

Depreciation 92.59% = -41665.5

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Book value 3334.5

Sale value. 6300

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Sale value is more than book value. So Capital gain = 2965.5

tax on capital gain (@ 25% of 2965.5)= 741.375

Calculation of after tax salvage value

Sale proceeds from equipment. 6300.000

less: Tax on capital gain of sale of asset -741.38

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So, equipment after tax salvage value = 5558.62

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