Question

A firm is considering leasing or buying a mower. The mower costs $1000 and can be depreciated and falls into the MACRS 3 year class (33%; 45%; 15% and 7%). A maintenance contract will be purchased for $200 per year payable at the start of each year for 4 years. The firms tax rate is 30%. The firm expects to sell the mower for $97 at the end of the 3rd year. What is the net sale price when the mower is sold?

Answer 1

Cost of Mower = $1,000

Calculation of Depreciation under MACRS and post tax Salvage Value :

Year	MACRS %	Depreciation = Cost of Mower * MACRS %	Book Value = Beginning Value – Depreciation for the year
1	33	330	1000 – 330 = 670
2	45	450	670 - 450 = 220
3	15	150	220 -150 = 70
4	7	70	70 – 70 = 0

Note : Under MARCS method salvage value is not considered while calculating depreciation.

Book Value after 3 years = $70
Pre Tax Salvage Value = $97
Profit on Sale = Pre Tax Salvage Value - Book Value
          = $97 - $70
          = $27
Tax on profit on sale = $27 * 30% = $8.1

Post Tax Salvage Value = Pre Tax Salvage Value – Tax on Profit on sale
          = $97 - $8.10
          = $88.90

Net Sale price when the mower will be sold is $88.90