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Marshall-Miller & Company is considering the purchase of a new machine for $60,000, installed. The machine...

  1. Marshall-Miller & Company is considering the purchase of a new machine for $60,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the depreciation rates below. The firm expects to operate the machine for 5 years and then to sell it for $18,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 5?

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

MACRS %

20%

32%

19%

12%

11%

6%

Depreciation expense

7,200

Book value

48,000

3,600

$0

If we sell at the end of year 5 for $18,500 then determine if we have a gain or a loss and the appropriate tax consequence

Explain answer and how to figure on financial calculator please

Solutions

Expert Solution

There is a gain of $14,900 .

The gain is simply the difference between selling price and book value at the time of sale.

Hence Gain = 18500-3600 = 14900 at the end of year 5

Tax =Tax rate*Capital gain

= 40%*14900 = 5960

After tax salvage = selling price- tax

= 18500-5960 = $ 12540

WORKINGS

Purchase cost 60000
Less: Depreciation
Year 1 12000
Year 2 19200
Year 3 11400
Year 4 7200
Year 5 6600
Book value 3600
Selling price 18500
Gain 14900

CALCULATION METHOD:

jeff jeffy answered 8 months ago
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