Your firm needs a computerized machine tool lathe which costs $47,000 and requir

Question

Your firm needs a computerized machine tool lathe which costs $47,000 and requires $11,700 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 11 percent.

If the lathe can be sold for $4,700 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.)

Your firm needs a computerized machine tool lathe which costs $47,000 and requires $11,700 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 11 percent.

Explanation / Answer

1.

calculate the depreciation each year

D1 = 47,000 * 33.33% = 15,665.1

D2 = 47,000 * 44.45% = 20,891.5

D3 = 47,000 * 14.81% = 6,960.7

2.

calculate the book value of the asset at December 31, 2003

BV3 = 47,000 - 15,665.1 - 20,891.5 - 6,960.7 = 3,482.7

The asset is selling for $4,700 which is higher than its BV

tax = (4,700 - 3,482.7)*34% = 413.88

salvage value after tax = 47,000 - 413.88 = 46,586.12

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