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

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 (1)--0.20 (Depreciation Rate)
Year (2)---0.32 (Depreciation Rate)
Year (3)---0.19 (Depreciation Rate)
Year (4)---0.12(Depreciation Rate)
Year (5)---0.11(Depreciation Rate)
Year (6)---0.06 (Depreciation Rate)






Answer
a)$12,600
b)$9,800
c)$13,100
d)$10,600
e)$10,400

**Please show how to derive answer, thanks!

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 Thus, the correct option is (d) $10,600

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