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Homework answers / question archive / Eletropaulo Ltd purchased a pizza doe-making machine for $ $280,000 280,000 just on 3 3 years ago

Eletropaulo Ltd purchased a pizza doe-making machine for $ $280,000 280,000 just on 3 3 years ago

Finance

Eletropaulo Ltd purchased a pizza doe-making machine for $

$280,000

280,000 just on 3

3 years ago. The machine has a 7

7-year useful life and will be depreciated on a straight-line basis to 10

10% of the original cost. The manager intends to replace the current machine with the new one at the cost of $

$295,000

295,000.

If the current machine can be sold right now for $

$106,000

106,000, what is the after-tax salvage of the sale given the tax rate of 30.0

30.0%?

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Computation of After-tax Salvage Value:

Cost of Old Machine = $280,000

Salvage Value = 10%*280000 = $28000

 

Annual Depreciation= (Cost-Salvage Value)/Useful Life

= ($280,000-$28,000)/7

= 252,000/7

= $36,000

 

Book Value of the Current Machine = $280,000 - 3*$36,000 = $172,000

Sale Value = $106,000

Loss on Sale = $106,000-$172,000 = -$66,000

 

Tax on Loss = Tax Rate*Loss on Sale 

= 30%*$66,000

= $19,800

 

After-tax Salvage Value = Sale Value  + Tax on Loss

= $106,000 + $19,800

= $125,800

 

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