Your ﬁrm needs a computerized line-boring machine which costs $80,000, and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero.
The machine falls into the Class 10 equipment category (CCA rate 30%). Assume a tax rate of 34%
And a discount rate of 10%.
Assume the machine can be sold for $10,000 at the end of year 1. Compute the present value of the
Pre-tax salvage value at the end of year 3.

Question

Quizplus · Accepted Answer

To calculate the present value of the pre-tax salvage value at the end of year 3, we need to find the after-tax salvage value and then discount it back to the present value at a rate of 10%.

First, let's calculate the after-tax salvage value:

Salvage Value = $0
Tax Rate = 34%
CCA Rate = 30%
Year 3 UCC = $80,000 x (1 - 0.30) x (1 - 0.30) = $31,360
Undepreciated Capital Cost (UCC) = Year 3 UCC - Salvage Value = $31,360 - $0 = $31,360

Taxable Income = Salvage Value - UCC = $0 - $31,360 = -$31,360
Tax Savings = Taxable Income x Tax Rate = -$10,638.40
After-tax Salvage Value = Salvage Value - Tax Savings = $0 - (-$10,638.40) = $10,638.40

Now, let's discount the after-tax salvage value back to the present value at a rate of 10%:

PV = FV / (1 + r)^n
PV = $10,638.40 / (1 + 0.10)^3
PV = $7,513.49

Therefore, the present value of the pre-tax salvage value at the end of year 3 is $7,513 (rounded to the nearest dollar). Option B is the best choice.

Your ﬁRm Needs a Computerized Line-Boring Machine Which Costs $80,000