Your firm needs a computerized machine tool lathe which costs $54,000 and requires $12,400 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35 percent and a discount rate of 11 percent. If the lathe can be sold for $5,400 at the end of year 3, what is the after-tax salvage value?

The salvage value after tax is $4910.49

Explanation:

Given Data;

Cost value = $54,000

MACRS = 3-year class life category

Cost of maintenance = $12,400

Tax rate = 35%

Discount rate = 11%

Sales value = $5,400

after-tax salvage value = ?

The MACRS class depreciation rate for 3 years is;

33.33% 44.44% 14.82% and 7.41%

Total depreciation rate = 33.33% + 44.45% + 14.81%

=92.59%

Therefore remaining book value = 100%-92.59%

=7.41%

The book value of asset after 3 years = cost of asset * remaining book value

$54,000 * 7.41%

$54,000 * 0.0741

$4001.4

The profit gain = Sales value - book value after 3 years

The profit gain = $ 5400 - 4001.4

= $1398.6

From the question a tax rate of 35% was paid

Therefore Tax on profit = profit gain * 35%

= $1398.6 * 0.35

= $489.51

The salvage value after tax = salvage value - tax on profit

= $5400 - $489.51

=$4910.49