Your firm needs a computerized machine tool lathe which costs $42,000 and requir

Question

Your firm needs a computerized machine tool lathe which costs $42,000 and requires $11,200 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 39 percent and a discount rate of 12 percent.

If the lathe can be sold for $4,200 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.)

Your firm needs a computerized machine tool lathe which costs $42,000 and requires $11,200 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 39 percent and a discount rate of 12 percent.

Explanation / Answer

Hi,

Please find the answer as follows:

After Tax Salvage Value = Sales Value +/- Tax on Gain/Loss on Sale of Machine Tool

Book Value = 42000*7.41% = 3112.20

Gain on Sale of Machine Tool = Sales Value - Book Value = 4200 - 3112.20 = 1087.80

Tax on Gain = 1087.80*.39 = 424.242

After Tax Salvage Value = 4200 - 424.242 = 3775.758 or 3775.76

Answer is 3775.758 or 3775.76.

Thanks.

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