It is Jan 1. The Rumpel Felt Company purchased a felt press last year at a cost

Question

It is Jan 1. The Rumpel Felt Company purchased a felt press last year at a cost of $7,500. The machine had in expected life of 3 year at the time of purchase. The machine was depreciated using MACRS with a 5-year recovery period. (MACRS depreciation rates are shown in the table The division manager reports that, for $12,000 (including installation), a new felt press can be bought The new felt press will expand sales, because the new fashion is for smoother felt The old machine s current market value is $1,000. Taxes are 40%. What is the net salvage value of the old press if Rumpel replaces it today? The net salvage value of the old press is $. (Round to the nearest whole dollar.)

Explanation / Answer

Purchase price of felt press = $7,500

Expected life of the asset is 3 years

MACRS 5 years recovery period depreciation rate is 20% for last year, 32% for this year

Depreciation for first year = $ 7,500* 20% = $ 1500

Depreciation for second year = $ 7,500* 32% = $ 2400

Accumulated depreciation = $ 1500 + $ 2400 = $ 3,900

Book value = Purchase price – accumulated depreciation

                   = $ 7,500 - $ 3,900 = $3,600

The capital gain = sale price – book value

Here sale price is $ 1,000 and tax rate is 40%

Now capital gain = $ 1,000 - $ 3,600 = - $ 2,600

As there is no capital gain therefore taxes are not applicable

Net Salvage value of asset = sale price – taxes of capital gain

                         = $ 1,000 – 0 = $ 1,000

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