Your firm needs a computerized machine tool lathe which costs $54,000 and requir

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.)

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.)

Explanation / Answer

The maintenance cost doesn't get included because those are yearly expenses that reduce the company's revenue on their annual tax return.

After 3 years on MACRS, the unit has no salvagable tax value. But if it is sold off at that time, then the proceeds from that sale are its "salvage value."

You will not be taxed on the $5,400 salvage proceeds. It will be deducted from the ZERO basis (due to MACRS) and it will have a negative basis at that point.

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