Your firm needs a computerized machine tool lathe which costs $50,000, requires
ID: 2705677 • Letter: Y
Question
Your firm needs a computerized machine tool lathe which costs $50,000, requires $10,000 in installation, $5,000 in freight charges and another $12,000 in maintenance for each year of its 3 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 30% and a discount rate of 12%. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value? $6,499.35 $6,344.95 $5,999.45 $6,554.95 $6,499.35 $6,344.95 $5,999.45 $6,554.95 $6,499.35 $6,344.95 $5,999.45 $6,554.95Explanation / Answer
After tax salvage value = Salvage Value - Tax on Profit on sales
Tax on profit on sales = Tax Rate x (Salvage Value - Book Value on date of sales)
MACRS rates for 3 years = 33.33%; 44.45%; 14.81%
Total MACRS Depreciation percentage for 3 years = 33.33% + 44.45% + 14.81% = 92.59%
Cost of acquisition of machine = Purchase cost + Installation + Freight
= $50,000 + $10,000 + $5,000 = $65,000
Total MACRS Depreciation of 3 years = $65,000 x 92.59% = $60,183.50
Book value at the end of 3 years = Initial acquisition cost - Total depreciation
= $65,000 - $60,183.50 = $4,816.50
Tax on Profit on sales = 30% x ($7,000 - $4,816.50)
= 30% x $2,183.50
= $655.05
After tax salvage value = $7,000 - $655.05 = $6,344.95
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