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29 June, 19:40

Your firm needs a computerized machine tool lathe which costs $54,000 and requires $12,400 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 35 percent and a discount rate of 11 percent. If the lathe can be sold for $5,400 at the end of year 3, what is the after-tax salvage value?

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  1. 29 June, 19:50
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    The salvage value after tax is $4910.49

    Explanation:

    Given Data;

    Cost value = $54,000

    MACRS = 3-year class life category

    Cost of maintenance = $12,400

    Tax rate = 35%

    Discount rate = 11%

    Sales value = $5,400

    after-tax salvage value = ?

    The MACRS class depreciation rate for 3 years is;

    33.33% 44.44% 14.82% and 7.41%

    Total depreciation rate = 33.33% + 44.45% + 14.81%

    =92.59%

    Therefore remaining book value = 100%-92.59%

    =7.41%

    The book value of asset after 3 years = cost of asset * remaining book value

    $54,000 * 7.41%

    $54,000 * 0.0741

    $4001.4

    The profit gain = Sales value - book value after 3 years

    The profit gain = $ 5400 - 4001.4

    = $1398.6

    From the question a tax rate of 35% was paid

    Therefore Tax on profit = profit gain * 35%

    = $1398.6 * 0.35

    = $489.51

    The salvage value after tax = salvage value - tax on profit

    = $5400 - $489.51

    =$4910.49
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