Your Company is considering buying a machine for $15,000. If bought, the machine

Question

Your Company is considering buying a machine for $15,000. If bought, the machine will produce annual cost savings of $3,000 for the next 5 years; these cash flows will be taxed at the company’s tax rate of 40%. The machine will be depreciated over the 5 year period using the accelerated depreciation percentages allowable in the United States. At the end of the 5th year, the machine will sold; your estimate of its salvage value at this point is $4,000, even though for accounting purposes its book value is $864. What is the cash flow from salvage value?

Explanation / Answer

Compute the cash flow from salvage value.

estimated salvage value = $4000.

Less: TAx on salvage value = 40% of $4000 = $1600

Salvage value after taxes = $2400.

Therefore, the cash flow from salvage value is $2400.

Note: Book value of the salvage value will not be considered for the budgeting decision.

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