Question

Pear Orchards is evaluating a new project that will require equipment of $237,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $59,300. However, the company plans to keep the equipment for a different project in another state. The tax rate is 40 percent. What after tax salvage value should the company use when evaluating the current project?

Answer 1

Initial Equipment Cost = $ 237000, MACRS Depreciation % : 20%, 32 %, 11.52 %, 11,52 %

Year 1: Initial Value = Initial Cost = $ 237000

Depreciation % = 20 % , Depreciation Expense = 0.2 x 237000 = $ 47400

Depreciated Value = 237000 - 47400 = $189600

Year 2: Initial Value = $ 189600

Depreciation % = 32 % , Depreciation Expense = 0.32 x 237000 = $ 75840

Depreciated Value = 189600 - 75840 = $113760

Year 3: Initial Value = $ 113760

Depreciation % = 11.52 % , Depreciation Expense = 0.1152 x 237000 = $ 27302.4

Depreciated Value = 113760 - 27302.4 = $ 86457.6

Year 4: Initial Value = $ 86457.6

Depreciation % = 11.52 % , Depreciation Expense = 0.1152 x 237000 = $ 27302.4

Depreciated Value = 86457.6  - 27302.4  = $59155.2

Salvage Value = $ 59300

Tax Rate = 40 %

After-Tax Salvage Value = Salvage Value - Tax Rate x (Salvage Value - Depreciated Value at the end of Year 4) = 59300 - 0.4 x (59300 - 59155.2) = $ 59242.1