McPherson Company must purchase a new milling machine. The purchase price is $50,000, including installation. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?
$\begin{array} { c c }
\text { Year } & \text { Depreciation Rate } \
1 & 0 .20 \
2 & 0.32 \
3 & 0.19 \
4 & 0.12 \
5 & 0.11 \
6 & 0.06
\end{array}$

Question

McPherson Company must purchase a new milling machine. The purchase price is $50,000, including installation. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?
 $\begin{array} { c c } 
\text { Year } & \text { Depreciation Rate } \
1 & 0 .20 \
2 & 0.32 \
3 & 0.19 \
4 & 0.12 \
5 & 0.11 \
6 & 0.06
\end{array}$

Quizplus · Accepted Answer

$\begin{array}{l}
\begin{array} { l } 
&\text { Deprec. }\
\text { Year }&\text { Rate } \
1&0.20\
2 & 0.32 \
3 & 0.19 \
4 & 0.12 \
5 & 0.11 \
6 & 0.06\
&1.00
\end{array}
\begin{array} { l } 
&\text { Annual }& \text { Year-end }\
\text { Basis }&\text { Deprec. }& \text { Book Value }\
\$ 50,000 & \$ 10,000 &\$40000\
50,000 & 16,000&24000 \
50,000 & 9,500&14500 \
50,000 & 6,000&8500 \
50,000 & 5,500 &3000\
50,000 & 3,000&0\
& 50,000 \
\end{array}
\end{array}$

$\begin{array}{l}
\begin{array} { l } 
\text { Gross sales proceeds (Market value)}& \
\text { Book value, end of Year 4 }&\
\text {Profit}&\
\text { Tax on Profit}& \text {Rate =40 \% }\
\text { AT salvage value $ = $ market value $ +/- $ taxes}&
\end{array}
\begin{array} { l } 
\$ 12,500 \
8,500\
4,000 \
1,600\
\$10900
\end{array}
\end{array}$

McPherson Company Must Purchase a New Milling Machine A) $8,878 B) $9,345 C) $9,837 D) $10,355 E) $10,900

McPherson Company Must Purchase a New Milling Machine A) $8,878
B) $9,345
C) $9,837
D) $10,355
E) $10,900