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Your firm needs a computerized machine tool lathe which costs
$59,000 and requires $12,900 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. Assume a
tax rate of 34 percent and a discount rate of 12 percent.
If the lathe can be sold for $5,900 at the end of year 3, what is the after-tax salvage value?
The lathe will have a remaining book value of 7.41% × $59,000 = $4,371.90. The after-tax cash flows from the sale of the lathe will be:
ATCF = Book value + (Market value – Book value) × (1 – TC)
= $4,371.90 + ($5,900 – $4,371.90) × (1 – 0.34)
= $5,380.45
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