Question

Pear Orchards is evaluating a new project that will require equipment of $249,000. The equipment will be depreciated on a 5 . year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $67,100. However, the company plans to keep the equipment for a different project in another state The tax rate is 21 percent. What aftertax saivage value should the company use when evaluating the current project? Multiple Choice

a) $67100 50
b) $67,100
c) $0
d) $72,155
e) $43,027
f) $62,045

Answer 1

The aftertax salvage value that the company should use when evaluating the current project is $67,100.

Step-by-step explanation:

The aftertax salvage value that the company should use when evaluating the current project is $67,100.

To calculate the after-tax salvage value, we first need to calculate the tax savings from the depreciation. Using the MACRS schedule and the equipment cost of $249,000, we can determine the annual depreciation expenses for each year: $49,800, $79,680, $47,808, $28,685.76, and $28,685.76. The total depreciation expense over the 4 years is $234,659.52.

The tax savings from the depreciation is the depreciation expense multiplied by the tax rate: $234,659.52 * 0.21 = $49,278.10.

The aftertax salvage value is the salvage value minus the tax savings: $67,100 - $49,278.10 = $17,821.90.