Marshall-Miller & Company is considering the purchase of a new machine for $50,0
ID: 2668166 • Letter: M
Question
Marshall-Miller & Company is 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 $12,000. 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 0.20
2 0.32
3 0.19
4 0.12
5 0.11
6 0.06
multiple choice
a. $12,600
b. $9,800
c. $13,100
d. $10,600
e. $10,400
Explanation / Answer
The after-tax salvage value is the market price minus (or plus) the taxes on the sale of the equipment, so:
After-tax salvage value = MV + (BV – MV) tc
1st year Depreciation Amount = $50,000 * 0.20 = $10,000
2nd year Depreciation Amount = $50,000 * 0.32 = $16,000
3rd year Depreciation Amount = $50,000 * 0.19 = $9,500
4th year Depreciation Amount = $50,000 * 0.12 = $6,000
Book Value of machine at the end of 4th year = [$10,000 + $16,000 + $9,500 + $6,000]
Book Value of machine at the end of 4th year = $41,500
Book Value of machine at the end of 4th year = [$50,000 - $41,500]
Book value of machine at the end of 4th year = $8,500
After-tax salvage value = MV + (BV – MV) tc
After-tax salvage value = $12,000 + ($8,500 - $12,000) 40%
After-tax salvage value = $12,000 + (-$1,400)
After-tax salvage value = = $12,000 - $1,400
After-tax salvage value = $10,600
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