Your firm needs a machine which costs $50,000, and requires $2,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. If this machine can be sold for $3,000 at the end of year 5, what is the after-tax salvage value?

Question

Quizplus · Accepted Answer

The after-tax salvage value is calculated by taking the salvage value and subtracting the tax on the gain from the sale. The tax is calculated as the difference between the salvage value and the book value, multiplied by the tax rate. The book value after 5 years using MACRS depreciation is $0, so the tax is $3,000 * 21% = $630. The after-tax salvage value is $3,000 - $630 = $2,370. However, the correct calculation should consider the MACRS depreciation schedule, which results in a different book value, leading to the correct after-tax salvage value of $2,974.80.

Your Firm Needs a Machine Which Costs $50,000, and Requires