Your firm needs a computerized machine tool lathe which costs $45,000 and requir

Question

Your firm needs a computerized machine tool lathe which costs $45,000 and requires $11,500 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 12 percent.

If the lathe can be sold for $4,500 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 $45,000 and requires $11,500 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 12 percent.

Explanation / Answer

Hi,

Please find the answer as follows:

Book Value at the End of 3 Years = 45000*7.41% = 3334.5

Gain on Sale of Machine = 4500 - 3334.5 = 1165.5

Tax on Gain = 1165.5*.34 = 396.27

After Tax Salvage Value = Sales Value - Tax on Gain = 4500 - 396.27 = 4103.73

Answer is 4103.73.

Thanks.

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