\"A firm purchases a new machine for $158,000. It borrows $63,200 at 6.5% annual
ID: 2532879 • Letter: #
Question
"A firm purchases a new machine for $158,000. It borrows $63,200 at 6.5% annual interest to be repaid in 3 years. The machine is depreciated using a 5-year MACRS. At the end of 3 years, the firm sells the machine for $60,000. The firm's tax rate is 34%. How much does the firm pay or save in taxes from selling this machine at the end of 3 years? In other words, what is the gains tax? If the firm will have to pay taxes from selling this machine, enter your answer as a positive number. If the firm will save money in taxes from selling the machine, enter the answer as a negative number. "
Explanation / Answer
Purchase cost of new machine = 158000
Calculation of depreciation amount for 3 years:
Year 1:
Depreciation amount = 158000*20% = 31600
Year 2:
Depreciation amount = 158000*32% = 50560
Year 3:
Depreciation amount = 158000*19.20% = 30336
Total depreciation charged in 3 years = 31600+50560+30336 = 112496
Book value of machine after 3 years = 158000 - 112496 = 45504
Selling price of machine after 3 years = 60000
Gain on sale of machine = Selling price of machine - Book value of machine = 60000 - 45504 = 14496
gains tax = Gain on sale of machine*tax rate = 14496*34% = 4928.64 i.e. 4929 (rounded off)
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