Russell's is considering purchasing $697,400 of equipment for a four-year project. The equipment falls in the five-year MACRS class with annual percentages of .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. At the end of the project the equipment can be sold for an estimated $135,000. The required return is 13.2 percent and the tax rate is 23 percent. What is the amount of the aftertax salvage value of the equipment assuming no bonus depreciation is taken?

Question

Quizplus · Accepted Answer

To find the aftertax salvage value, we need to first calculate the book value of the equipment at the end of the project:

Year 1: $697,400 x 0.2 = $139,480 depreciation
Year 2: $697,400 x 0.32 = $223,168 depreciation
Year 3: $697,400 x 0.192 = $133,628.80 depreciation
Year 4: $697,400 x 0.1152 = $80,444.48 depreciation
Year 5: $697,400 x 0.1152 = $80,444.48 depreciation
Year 6: $697,400 x 0.0576 = $40,222.24 depreciation

Total depreciation = $697,388
Book value = $697,400 – $697,388 = $12

The equipment can be sold for $135,000, so the before-tax salvage value is $135,012. The tax on the gain or loss from the sale of the equipment is:

Tax = 0.23 x (Salvage value – Book value)
= 0.23 x ($135,012 – $12)
= $31,049.76

The aftertax salvage value is:

Aftertax salvage value = Salvage value – Tax
= $135,012 – $31,049.76
= $103,962.24

Therefore, the answer is B) $131,667.47.

Russell's Is Considering Purchasing $697,400 of Equipment for a Four-Year