Question

Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years. Under the new tax law, the machine is eligible for 100% bonus depreciation, so it will be fully depreciated at t= 0. The firm expects to operate the machine for 4 years and then to sell it for $21,500. If the marginal tax rate is 25%, what will the after-tax salvage value be when the machine is sold at the end of Year 4? $16,125 $12,225 $12,551 $12,877 $14,833

Answer 1

1. As all the tax benefits is availed at the beginning , the entire realisation amount (salvage ) is subject to taxes at the end of 4 years and the after tax salvage value = $21500 * (1- 0.25)

=$16125 (Option 1)

2. After tax Costs for year 0 = $ 100,000 + $65000* (1-t)

= $148,750

After tax profits for year 1-3 = ($116000 -$25000) (1-0.25)

= $68,250

So, NPV = present value of cash flows discounted at WACC

= -148750 + 68250/1.10 + 68250 /1.10² + 68250/1.10³

= -148750 +62045.45 +56404.96+51277.24

= 20977.65

=$20978 (Option 3)