Question

Bill​ Sharpe, owner of Sharper Knives​ Inc., is closing the scissor sharpening division of his business at the end of the current fiscal year. The​ division's sole​ asset, the scissorminussharpening ​machine, was purchased four years ago for​ $250,000. The asset is in Class 43 with a depreciation rate of​ 30%. A depreciation table for the asset is shown below. Bill has agreed to sell the machine at the end of the year​ (Year 4) for​ $100,000. What is the present value of the tax shields gained​ (lost) as a result of the sale of the​ machine? (As of Year​ 4.) The tax rate is​ 35% and​ Bill's cost of capital is​ 9.7%. Round your answers to the nearest dollar.

Depreciation Table for Scissor Sharpener Year 1 Year 2 Year 3 148,750 0.300 44,625 104,125 Year4 UCC t-1 Depreciation Rate Depreciation Expense UCC t 250,000 212,500 0.300 63,750 212,500 148,750 104,125 0.300 31,238 72,888 0.150 37,500

Please explain the answer step by step. Thank you!

Answer 1

Year	Dep @ 30%	Value	Tax Rate	Tax Shield lost
	A		B	C=A*B
Y0		250,000.00
Y1	37,500.00	212,500.00	35%
Y2	63,750.00	148,750.00	35%
Y3	44,625.00	104,125.00	35%
Y4	31,238.00	72,887.00	35%
Y5	21,866.10	51,020.90	35%	7,653.14
Y6	15,306.27	35,714.63	35%	5,357.19
Y7	10,714.39	25,000.24	35%	3,750.04
Y8	7,500.07	17,500.17	35%	2,625.03
Y9	5,250.05	12,250.12	35%	1,837.52
Y10	3,675.04	8,575.08	35%	1,286.26
Y11	2,572.52	6,002.56	35%	900.38
Y12	1,800.77	4,201.79	35%	630.27
Y13	1,260.54	2,941.25	35%	441.19
Y14	882.38	2,058.88	35%	308.83
Y15	617.66	1,441.21	35%	216.18
				25,006
*It is assumed that asset had a life of 15 years with no salvage value.