Question

A manufacturer of fabricated metal products has acquired a new plasma table for $37,000. It is projected that the acquisition of this equipment will increase revenue by $10,000 per year. Operating costs for the machine will average $2,600 per year. The machine will be depreciated using the MACRS method, with a recovery period of 7 years. The company uses an after-tax MARR rate of 10% and has an effective tax rate of 30%.

2. Now, suppose that the duration of the project is six years and that an estimate of the value of the equipment cannot be obtained from the marketplace.

2.4. What is the tax on the disposal transaction?

Answer 1

		0	1	2	3	4	5	6
	Cost of Table	-37000	0	0	0	0	0	0
	Revenue	0	10000	10000	10000	10000	10000	10000
Less:	Operating Cost	0	-2600	-2600	-2600	-2600	-2600	-2600
Less:	Depreciation	0	-5287	-9061	-6471	-4621	-3304	-3300
	Cash Flow Before Tax	0	2113	-1661	929	2779	4096	4100
Less:	Tax @ 30%	0	-634	0	-279	-834	-1229	-1230
Add:	Tax Saving on Loss on Sale of Asset	0	0	0	0	0	0	1486
	Cash Flow After Tax	0	1479	-1661	650	1945	2867	4356
Add:	Depreciation	0	5287	9061	6471	4621	3304	3300
	Adjusted Cash Flow	-37000	6766	7400	7121	6566	6171	7656
	PVF @ 10%	1	0.91	0.83	0.75	0.68	0.62	0.56
	Present Value	-37000	6151	6116	5350	4485	3832	4322
	Net Present Value	-6744

Here NPV is Negative. Hence the manufacturer must not acquire the same.

Here it is given that the value of the equipment cannot be obtained from market place. Hence Sale value is 0 against Book Value of $ 4954. Therefore the manufacturer will incur loss. But he will get tax shield for the same = $4954 * 0.30 = $1486.