Question

Your firm needs a computerized machine tool lathe which costs $50,000 and requires $12,000 in maintenance for each year of its 3- year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category, and neither bonus depreciation nor Section 179 expensing can be used. Assume a tax rate of 21 percent and a discount rate of 12 percent. If the lathe can be sold for $5,000 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.)

Answer 1

To find the after-tax salvage value of the lathe, calculate the tax savings from depreciation and subtract it from the salvage value.

Step-by-step explanation:

To find the after-tax salvage value of the lathe, we need to calculate the tax savings from the depreciation of the machine.

The lathe falls into the MACRS 3-year class life category, so it will be depreciated using the MACRS depreciation schedule.

In year 3, the depreciation expense is $5,000.

Multiplying this by the tax rate of 21% gives us a tax savings of $1,050.

Subtracting this tax savings from the salvage value of $5,000 gives us an after-tax salvage value of $3,950.

Answer 2

The after-tax salvage value of the lathe is calculated by subtracting the taxes due on the salvage income from the sale price. With a sale price of $5,000 and a tax rate of 21 percent, the after-tax salvage value is $3,950.00.

Step-by-step explanation:

To find the after-tax salvage value, one must account for the remaining book value of the lathe and taxes on the salvage income. The machine has a cost of $50,000 and will be sold for $5,000 at the end of year 3. The after-tax salvage value is determined by subtracting any taxes owed on the sale from the sale price. The taxes owed depend on the difference between the sale price and the book value of the lathe at the end of 3 years. Assuming linear depreciation for simplification (as MACRS-specific percentages are not provided), the book value at the end of three years would be zero. Hence, the entire $5,000 is a taxable gain. We then calculate the tax on the $5,000 and subtract it from the $5,000 to get the after-tax salvage value: $5,000 - ($5,000 x 21%) = $5,000 - $1,050 = $3,950.00.