Dave's Demolitions Inc. is considering purchasing $697,400 of equipment for a four- year project. The equipment falls in the five-year MACRS class. At the end of the project the equipment can be sold for an estimated $135,000. If the tax rate is 23 percent, what is the amount of the after-tax salvage value of the equipment?
Dave's Demolitions Inc. is considering purchasing $697,400 of equipment for a four- year project. The equipment falls in the five-year MACRS class. At the end of the project the equipment can be sold for an estimated $135,000. If the tax rate is 23 percent, what is the amount of the after-tax salvage value of the equipment?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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![**Text Transcription:**
Dave's Demolitions Inc. is considering purchasing $697,400 of equipment for a four-year project. The equipment falls in the five-year MACRS class. At the end of the project, the equipment can be sold for an estimated $135,000. If the tax rate is 23 percent, what is the amount of the after-tax salvage value of the equipment?
**Educational Explanation:**
This problem involves calculating the after-tax salvage value of equipment. Here's a breakdown of key terms and steps to solve it:
1. **MACRS Depreciation**: Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation for tax purposes in the U.S., allowing for accelerated write-offs of property under the IRS code. The equipment is in the five-year class, but used for a four-year project.
2. **After-Tax Salvage Value Calculation**:
- **Initial Cost**: $697,400
- **Estimated Salvage Value**: $135,000
- **Tax Rate**: 23%
The after-tax salvage value is calculated as:
\[
\text{After-Tax Salvage Value} = \text{Salvage Value} - (\text{Salvage Value} - \text{Book Value}) \times \text{Tax Rate}
\]
Without the book value, you'll complete calculations based on defined depreciation according to the MACRS table for the given timeframe.
3. **Tax Impact**: Understanding how salvage value adjustments for tax impacts the net cash flow post-project.
This problem is a practical application of accounting principles related to depreciation and taxation.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2f9c3ee4-3184-4dac-b08f-3b624081feab%2F3c600278-0c3a-45aa-a44c-18884cbb1e0b%2Fa3mibz_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Text Transcription:**
Dave's Demolitions Inc. is considering purchasing $697,400 of equipment for a four-year project. The equipment falls in the five-year MACRS class. At the end of the project, the equipment can be sold for an estimated $135,000. If the tax rate is 23 percent, what is the amount of the after-tax salvage value of the equipment?
**Educational Explanation:**
This problem involves calculating the after-tax salvage value of equipment. Here's a breakdown of key terms and steps to solve it:
1. **MACRS Depreciation**: Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation for tax purposes in the U.S., allowing for accelerated write-offs of property under the IRS code. The equipment is in the five-year class, but used for a four-year project.
2. **After-Tax Salvage Value Calculation**:
- **Initial Cost**: $697,400
- **Estimated Salvage Value**: $135,000
- **Tax Rate**: 23%
The after-tax salvage value is calculated as:
\[
\text{After-Tax Salvage Value} = \text{Salvage Value} - (\text{Salvage Value} - \text{Book Value}) \times \text{Tax Rate}
\]
Without the book value, you'll complete calculations based on defined depreciation according to the MACRS table for the given timeframe.
3. **Tax Impact**: Understanding how salvage value adjustments for tax impacts the net cash flow post-project.
This problem is a practical application of accounting principles related to depreciation and taxation.
Expert Solution
Step 1: Introduction to the Salvage Value Net of Tax
Salvage Value net of tax refers to the sale value of the he equipment or the project after the useful life ofequipment. It exclude the tax if any arise on profit from sale of equipment.
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