Question

Your firm needs a computerized machine tool lathe which costs $54,000 and requires $12,400 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. Assume a tax rate of 35 percent and a discount rate of 11 percent.

If the lathe can be sold for $5,400 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.)
Salvage value after tax $

Answer 1

The after-tax salvage value of the lathe, which is sold at the end of its 3-year life for a gross salvage value of $5,400 and considering a 35% tax rate, is $3,510 after rounding to two decimal places.

Step-by-step explanation:

To calculate the after-tax salvage value of the computerized machine tool lathe, which will be sold for $5,400 at the end of its 3-year life, we need to subtract any taxes that would be due because of the sale from the gross salvage value. Since the machinery falls into the MACRS 3-year class life category, it would have been fully depreciated by the end of its third year. The entire sale price would therefore be recognized as a gain, which would be taxed at the given tax rate of 35 percent.

The tax liability on the sale can be calculated as follows:

• Gross Salvage Value = $5,400
• Tax Liability = Gross Salvage Value × Tax Rate
• Tax Liability = $5,400 × 0.35 = $1,890
• After-Tax Salvage Value = Gross Salvage Value - Tax Liability
• After-Tax Salvage Value = $5,400 - $1,890 = $3,510

The after-tax salvage value of the lathe is $3,510 after rounding to two decimal places.