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 of0$7,500. The machine had an expected life of 3 years 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 LOADING....) 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 $1,300. Taxes are 40%. What is the net salvage value of the old press if Rumpel replaces it today?

Explanation / Answer

Step 1: Calculate Book Value of Old Felt Press

The book value of old felt press is calculated as below:

Book Value of Felt Press Today = Cost of Old Felt Press - Depreciation for First Year on Old Felt Press

Using the values provided in the question and MACRS depreciation rates, we get,

Book Value of Old Felt Press Today = 7,500 - 20%*7,500 = $6,000

_____

Step 2: Calculate Loss on Old Felt Press

The value of loss on old felt press is determined as below:

Loss on Old Felt Press = Current Book Value - Current Market Value = 6,000 - 1,300 = $4,700

_____

Step 2: Calculate Net Salvage Value of Old Felt Press

The net salvage value of old felt press can be calculated as below:

Net Salvage Value of Old Felt Press = Current Market Value + Tax Saving on Disposal of Old Felt Press = 1,300 + 4,700*40% = $3,180 (answer)

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