1) Your firm needs a computerized machine tool lathe which costs $59,000 and req
ID: 2706870 • Letter: 1
Question
1) Your firm needs a computerized machine tool lathe which costs $59,000 and requires $12,900 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 34 percent and a discount rate of 12 percent.
Calculate the depreciation tax shield for this project in year 3.
2)
Your firm needs a computerized machine tool lathe which costs $56,000 and requires $12,600 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 12 percent.
If the lathe can be sold for $5,600 at the end of year 3, what is the after-tax salvage value?
1) Your firm needs a computerized machine tool lathe which costs $59,000 and requires $12,900 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 34 percent and a discount rate of 12 percent.
Explanation / Answer
1) Your firm needs a computerized machine tool lathe which costs $59,000 and requires $12,900 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 34 percent and a discount rate of 12 percent.
Calculate the depreciation tax shield for this project in year 3.
Depreciation tax shield for this project in year 3. = 59000*14.81%*34% = $ 2970.89
2)
Your firm needs a computerized machine tool lathe which costs $56,000 and requires $12,600 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 12 percent.
If the lathe can be sold for $5,600 at the end of year 3, what is the after-tax salvage value?
Book Value at the end of 3 year = 56000*7.41% = $ 4149.60
sale value = $ 5600
Profit = $ 1450.40
tax expenses = 1450.40*35% = $ 507.64
After Tax salvage value = 5600- 507.64 = $ 5092.36
Calculate the depreciation tax shield for this project in year 3.
Depreciation tax shield for this project in year 3. = 59000*14.81%*34% = $ 2970.89
2)
Your firm needs a computerized machine tool lathe which costs $56,000 and requires $12,600 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 12 percent.
If the lathe can be sold for $5,600 at the end of year 3, what is the after-tax salvage value?
Book Value at the end of 3 year = 56000*7.41% = $ 4149.60
sale value = $ 5600
Profit = $ 1450.40
tax expenses = 1450.40*35% = $ 507.64
After Tax salvage value = 5600- 507.64 = $ 5092.36
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