Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Assume the firm decided to forego any bonus depreciation. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (TC represents the relevant tax rate)

Question

Quizplus · Accepted Answer

The aftertax salvage value of the machine is calculated as the sale price plus the tax effect on the difference between the sale price and the book value. If the sale price is higher than the book value, the firm incurs a tax on the gain. If the sale price is lower, the firm gets a tax benefit. Therefore, the correct formula is Sale price + (Book value − Sale price)(TC), which accounts for the tax benefit if the machine is sold for less than its book value.

Three Years Ago, Knox Glass Purchased a Machine for a Three-Year