Question

40. Mertogul & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the depreciation rates below. The firm expects to operate the machine for 4 years and then to sell it for $16,000. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4? Year Depreciation Rate 0.20 0.32 0.19 0.12 0.11 0.06 a. $11,700 b. $16,250 c. $12,610 d. $13,000 e. $12,350

Answer 1

Calculation of Book value of machine at the End of year 4.1 Cost of machine - $50,000 Less depreciation year 1 $50,000 X 20 % - - $ 10,000 Ending Book Value Year 1 = $ 40,000 Less: depreciation for year a $ 50,000 X 320) =-$ 16000 Book Value Year ending 2 - $ 24000 Less! Depreciation Year $50000 X 190% 3 - - $ 9500 Book value at year end 3 = $19500 Depreciation for year y $50,000 X 12. --$ 6000 Book Value year ending 4 $8500

Calculation Protit on sales of machine at the end of year 4. After tax . - $ 16000 - - $8500 Sale value of machine Less: Book value of machine Protet before tax Less tax @ 40% on Protetf Protuts on sale After tax 7500 = - $ 3000 = $4500 Calculation of salvage value of machine Affer tax at the end of year 4 Book Value 2 $ 8500 Add Protet on sales After tax = $ 4500 Salvage value After tax = $13000 Hence salvage Value of machine After tax end of year u would be $13000 at the