marshall-miller & company is considering the purchase of a new machine for $50,0

ID: 2754758 • Letter: M

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 depreciation rates below. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax proceeds be when the machine is sold at the end of Year 4? Year 1 Depreciation Rate .20, Year 2 Depreciation rate .32 Year 3 Depreciation .19, Year 4 Depreciation .12, Year 5 Depreciation .11 Year 6 Depreciation .06

Explanation / Answer

Depreciation charge upto date of sale:

Rate

Amount

Depreciation for Year 1

0.20

$10,000.00

Depreciation for Year 2

0.32

$16,000.00

Depreciation for Year 3

0.19

$9,500.00

Depreciation for Year 4

0.12

$6,000.00

Total

$41,500.00

Book value of machine as on date of sale = Purchase price – Accumulated depreciation = $50,000 - $41,500 = $8,500

Selling price = $12,500

Gain on sale of machine = $12,500 - $8,500 = $4,000

Tax rate = 40%

Tax on capital gain = $4,000 * 0.40 = $1,600

Net proceeds on sale of machine = Selling price – Tax paid on capital gain = $12,500 - $1,600 = $10,900