Marshall-Miller & Company os considering the purchase of a new machine for $50,0

Question

Marshall-Miller & Company os considering the purchase of a new machine for $50,000 installed. The machine has a tax life of 5 years and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after tax salvage value be when the machine is sold at the end of year 4?

Year                   Depreciation rate
1               =                    .20
2               =                    .32
3               =                    .19
4               =                    .12
5               =                     .11
6               =                     .06

Explanation / Answer

Year Depreciation Rate Basis Annual dep. Book value 1 0.2 $50,000 $10,000 $40,000 2 0.32 $50,000 $16,000 $24,000 3 0.19 $50,000 $9,500 $14,500 4 0.12 $50,000 $6,000 $8,500 5 0.11 $50,000 $5,500 $3,000 6 0.06 $50,000 $3,000 $0 1 $50,000 Gross sales proceeds $12,500 Book value, end of Year 4 $8,500 Profit $4,000 Tax on profit@40% $1,600 AfterTax salvage value = market value +/ taxes $12,500 - $16,00 $10,900

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