Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $7,000 at the end of year 3, 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 difference between the salvage value and the book value. The book value is calculated using MACRS depreciation. After calculating the depreciation and book value, the after-tax salvage value is $6,344.95.

Your Firm Needs a Computerized Machine Tool Lathe That Costs