Your firm needs a computerized machine tool lathe which costs $50,000 and requires $12,000 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, and neitherbonus depreciation nor Section 179 expensing can be used. Assume a tax rate of 21 percent and a discount rate of 12 percent.If the lathe can be sold for $5,000 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.)Salvage value after tax< Prev2 of 14Next >MacBook Air

After-Tax Salvage Value: It is the value of the asset after all depreciation has been taken into account. The remaining value is reduced by the tax to arrive at after-tax salvage value. Information Provided: Costs = $50,000 Maintenance = $12,000 Term = 3 years Computation: MACRS 3-year depreciation rates:1st year=33.33%2nd year=44.45%3rd year=14.81%Total depreciation=33.33%+44.45%+14.81%Total depreciation=92.59%Book value of asset after Year 3=Cost of asset * (1-total depreciation)Book value of asset after Year 3=$50,000 * (1-92.59%)Book value of asset after Year 3=$3705Computation: Capital gain from sale=Sale value-Book value at year 3 endCapital gain from sale=$5000-$3705Capital gain from sale=$1295Tax on capital gain=Capital gain on sale * Tax rateTax on capital gain=$1295 * 21%Tax on capital gain=$271.95Net Salvage value after tax=Salvage value-Tax on capital gainNet Salvage value after tax=$5000-$271.95Net Salvage value after tax=$4728.05Answer: The after-tax salvage value is $4728.05

Answered: If the lathe can be sold for $5,000 at…

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

Problem 1PS

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You buy a piece of equipment for $2,000 and depreciate it over time to $500. You then sell the equipment for $700. Assuming a tax rate of 40%, your net cash proceeds from the sale is: $700 $500 620 $420
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5. A given item has a spelling price of $1,000. Its value depreciates at a rate of 12% per annum. What will be its selling price after 6 years? Tabulate the annual depreciation amounts and the book value of the equipment at the end of each year.
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