4.46 An eight year project involves equipment costing $3,340,000 that will be de

Question

4.46

An eight year project involves equipment costing $3,340,000 that will be depreciated using the five-year MACRS schedule. If the estimated pre-tax salvage value for the equipment at the end of the project's life is $567,800, what is the after-tax salvage value for the equipment? Assume a marginal tax rate of 34 percent.

MACRS Depreciation Allowances Property Class Year 3-Year 5-Year 7-Year 1 33.33% 20.00% 14.29% 2 44.45    32.00    24.49    3 14.81    19.20    17.49    4 7.41    11.52    12.49    5 11.52    8.93    6 5.76    8.92    7 8.93    8

4.46

Explanation / Answer

Assuming salvage value before tax is the MV To calculate after-tax salvage value for the equipment we need to find find the BV at the end of four years by adding the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost

=BV4=3,340,000-3,340,000((0.2000+0.3200+0.1920+0.1150)

=3340000-3,340,000(0.8270)

=3340000-2762180

=577820

as

The asset is sold at a Loss to book value ,

After tax salvage value =567,800-(577820-567,800)(0.34)

=567800-3406.8

=564393.2

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