Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of th

Question

Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was epected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of $1,200. The machine can be sold for $3,500 today.

Bulldog is considering the purchase of a new leather-cutting machine to replace exisiting machine. Having the new machine will result in an increase of revenue $13,000, but the operating costs will also increase by $6,000 for 3 years. The new machine cost $14,000, with an expected salvage of $2,000 at the end of the third year. The new machine will be depreciated using MACRS method, and is considered a 3-year property. There will be an increase of $1,600 in net working capital. Gorilla's tax rate is 40% and cost of capital is 16%.

What is the book value of the old machine today? Answer is $4,200, how did I get this? Show work

Explanation / Answer

Cost of old machinery = 11200

expected salvage value = 1200

expected useful life = 10 years

Depreciation per year under SLM = (11200-1200) / 10

= 1000 p.a

WDV at the end of seventh year = 11200 - (1000*7y) = 4200

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