. Edward\'s Manufactured Homes purchased some machinery 2 years ago for $319,000
ID: 2706525 • Letter: #
Question
. Edward's Manufactured Homes purchased some machinery 2 years ago for $319,000. These assets are classified as 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for $140,000 to a foreign firm for use in its production facility in South America. What is the aftertax salvage value from this sale if the tax rate is 35 percent?
MACRS 5 YEAR
1 20%
2 32%
3 19.2%
4 11.52%
5 11.52%
6 5.76%
A.
$135,408
B.
$140,000
C.
$142,312
D.
$144,592
E.
$146,820
PLEASE WORK PROBLEM OUT
A.
$135,408
B.
$140,000
C.
$142,312
D.
$144,592
E.
$146,820
Explanation / Answer
That's a strange 5-year depreciation table you give us here.
However, based on your table above, after 2 years 52% of the cost of the equipment has been written off.
Therefore the remaining basis is 48% or $319,000 x 0.48 = $153120.
Deduct the salvage value of $140,000 leaves at tax loss of $13,120.
At the 35% tax rate that amounts to a tax savings of $13,120 x 0.35 = $4,592.
Adding the salvage price of$140,000 to the tax savings results
in an after-tax value of $144592
and your answer is D.
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