Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 12 percent. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value?
A) $6,499.35
B) $6,541.47
C) $5,999.45
D) $4,816.50

Question

Quizplus · Accepted Answer

The after-tax salvage value is calculated by taking the salvage value and subtracting the taxes on the salvage value. The taxes are calculated based on the difference between the salvage value and the book value of the asset at the time of sale. Since the asset is fully depreciated (using MACRS for a three-year life), its book value is zero. Therefore, the tax on the salvage value is $7,000 * 21% = $1,470. The after-tax salvage value is then $7,000 - $1,470 = $5,530. However, the correct calculation should account for the tax savings, not just subtract the tax, making the correct after-tax salvage value $7,000 * (1 - 0.21) = $5,530, which does not match any of the provided options directly, suggesting a misunderstanding in the explanation process. The correct approach involves considering the tax impact on the salvage value correctly, which typically involves calculating the tax benefit or cost associated with the disposal of the asset. Given the options and the typical calculation method, the closest correct approach would involve adjusting the salvage value for the tax effect correctly, but the provided explanation and calculation method was incorrect. The correct answer, based on the options given and typical financial calculations, should consider the net effect of taxes on the salvage value, which involves more detailed financial analysis than provided.

Your Firm Needs a Computerized Machine Tool Lathe That Costs