Question

Your firm needs a machine which costs $50,000, and requires $2,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 35 percent and a discount rate of 10 percent. If this machine can be sold for $3,000 at the end of year 5, what is the after-tax salvage value?

Answer 1

As per MACRS five year class life category ,Depreciation rates are as follows :

Year	Depreciation rates	Accumulated depreciation rates
1	20%	20%
2	32%	20+32 = 52%
3	19.2%	52+19.2 = 71.2%
4	11.52%	71.2+11.52%= 82.72%
5	11.52%	82.72 +11.52 = 94.24%
6	5.76%	94.24+5.76 = 100%

Un-amortized Book value of machine at end of year 5 = Cost * (1-Accumulated Depreciation rate )

                                       = 50000 * (1-.9424)

                                       = 50000 * .0576

                                       = 2880

Gain on sale =Sale value -Book value

                     = 3000 -2880

                       = 120

Tax on gain =Gain on sale *tax rate

               = 120 *35%

                = 42

After tax salvage value = sale value - Tax on gain

                                       = 3000 - 42

                                      = $ 2958