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After-tax Salvage Value Suppose that ABC Company purchased $10000 of machinery 3 years ago
After-tax Salvage Value
- Suppose that ABC Company purchased $10000 of machinery 3 years ago. The machinery is 5-year MACRS property. The firm is selling this equipment today for $5000. What is the After-tax Salvage Value if the tax rate is 30%?
Comment: This follows a pattern: Selling Price of the depreciated asset - the remaining book value to get the gain or loss. Calculate the tax, then subtract the tax from the selling price to get the after-tax salvage value.
- Suppose that ABC Company purchased $10000 of machinery 4 years ago. The machinery is 5-year MACRS property. The firm is selling this equipment today for $5000. What is the After-tax Salvage Value if the tax rate is 30%?
- Suppose that ABC Company purchased $10000 of machinery 5 years ago. The machinery is 5-year MACRS property. The firm is selling this equipment today for $5000. What is the After-tax Salvage Value if the tax rate is 30%?
The MACRS allowance percentages are as follows, commencing with year one: 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, 5.76%.
Show work step-by-step using excel
Expert Solution
| 1 | Computation of After-tax Salvage Value if Machinery Purchased 3 Years Ago: | |
| Purchase Cost of Equipment (A) | 10000 | |
| Depreciation for 3 years = 10000 * (20% +32% +19.20%) (B) | 7120 | |
| Book Value at the Time of Sale (C = A-B) | 2880 | |
| Sales Value of Equipment (D) | 5000 | |
| Gain on Sale (E = D-C) | 2120 | |
| Tax on Gain on sale (F = E *30%) | 636 | |
| After-tax Salvage Value (D - F) | 4364 | |
| 2 | Computation of After-tax Salvage Value if Machinery Purchased 4 Years Ago: | |
| Purchase Cost of Equipment (A) | 10000 | |
| Depreciation for 4 years = 10000 * (20% +32% +19.20%+11.52%) (B) | 8272 | |
| Book Value at the Time of Sale (C = A-B) | 1728 | |
| Sales Value of Equipment (D) | 5000 | |
| Gain on Sale (E = D-C) | 3272 | |
| Tax on Gain on sale (F = E *30%) | 981.6 | |
| After-tax Salvage Value (D - F) | 4018.4 | |
| 3 | Computation of After-tax Salvage Value if Machinery Purchased 5 Years Ago: | |
| Purchase Cost of Equipment (A) | 10000 | |
| Depreciation for 5 years = 10000 * (20% +32% +19.20%+11.52%+11.52%) (B) | 9424 | |
| Book Value at the Time of Sale (C = A-B) | 576 | |
| Sales Value of Equipment (D) | 5000 | |
| Gain on Sale (E = D-C) | 4424 | |
| Tax on Gain on sale (F = E *30%) | 1327.2 | |
| After-tax Salvage Value (D - F) | 3672.8 |
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