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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. 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%?
Expert Solution
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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