Question

Your firm needs a computerized machine tool lathe which costs $56,886 and requires $8,162 in maintenance expense for each year of its 5-year life. After five years, this machine will be replaced. The machine falls into the MACRS (Links to an external site.) 5-year class life category. Assume a tax rate of 25 percent and a discount rate of 12 percent. If the lathe can be sold for $15,561 at the end of year 5, what is the after-tax salvage value? Below are the MACRS rates for the 5-year recovery period. DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ENTER YOUR ANSWER TO THE NEAREST DOLLAR (e.g. 1250).

Year	MACRS Rate
1	20.00%
2	32.00%
3	19.20%
4	11.52%
5	11.52%
6	5.76%

Answer 1

Book value = (purchase price)*(1-sum of MACR rates from beginning to current date)
= (56886)*(1-0.2-0.32-0.192-0.1152-0.1152)
= 3276.63
After tax salvage value = selling price*(1-tax rate)+book value*tax rate
=15561*(1-0.25)+3276.63*0.25
=12490