A company is considering a 5-year project to expand production with the purchase

Question

A company is considering a 5-year project to expand production with the purchase of a new automated machine using the latest technology. The new machine would cost $220,000 FOB St. Louis, with a shipping cost of $7,000 to the plant location. Installation expenses of $11,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $53,000 at the end of the project. If the corporate tax rate is 35%, what is the after tax salvage cash flow for this new machine at the end of the project? (Answer to the nearest dollar.) MACRS percentages for depreciation each year are as follows:

Year    %

1    14.29

2     24.49

3     17.49

4     12.49

5      8.93

6      8.93

7      8.93

8    4.45

Explanation / Answer

At the end of 7 years, the new machne will be depreciated 95.55% of its total value (14.29+24.49+17.49+12.49+8.93+8.93+8.93 = 95.55)

So the book value remaining will be 4.45%*$220,000 = $ 9790

Now, the salvage value is $53,000

Profit is $43,210

Tax rate is 30%, therefore tax on this profit is 35%*$43210 = $15123

Therefore, after-tax salvage cash for this machine after 7 years is 53000-15123 = $37,877

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.