Your firm is considering either leasing or buying some new equipment. The lessor will charge $17,500 a year for 3 years should you decide to lease. The purchase price is $61,000. The equipment has a 3-year life after which it is expected to have a resale value of $13,000. Your firm uses straight-line depreciation, borrows money at 9 percent, and has a 34 percent tax rate. What is the after-tax salvage value of the equipment?
A) $8,580
B) $9,701
C) $11,407
D) $18,529
E) $19,697

Question

Quizplus · Accepted Answer

The after-tax salvage value is calculated as the resale value minus the tax on the difference between the resale value and the book value. The book value after 3 years is $0 (since it's fully depreciated). Thus, the after-tax salvage value is $13,000 - ($13,000 * 34%) = $8,580.

Your Firm Is Considering Either Leasing or Buying Some New