Question

"A company bought a machine for $138,000. The machine was depriciated using a 5 year MACRS approach. After 3 years, the machine was sold at a salvage value of $83,500. Assuming a tax rate of 27%, what are the net proceeds from the sale of the machine?
(Hint: You will want to take your salvage values and add/subtract gains due to the sale.)"

Answer 1

As per MACRS table in the text, 5-year property class has 6 years recovery. Rates of depreciation are 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76%.

Since the machine is sold after 3 year, recovered depreciation is (20% + 32% + 19.20% =) 71.20%.

Cost of machine = $138,000

Depreciation recovered = $138,000 × 71.20% = $98,256

Depreciation non-recovered = 138,000 – 98,256 = $39,744

Net proceeds [gain or (loss)] = (Salvage value + Depreciation recovered – Cost of machine) × (1 – tax rate)

                                                = (83,500 + 98,256 – 138,000) × (1 – 0.27)

                                                = 43,756 × 0.73

                                                = $31,941.88 Answer

Alternative way:

Net proceeds = (Salvage value - Depreciation non-recovered) × (1 – tax rate)

                        = (83,500 – 39,744) × (1 – 0.27)

                        = 43,756 × 0.73

                        = $31,941.88 Answer