Question

Wertheim Industries has purchased industrial equipment for a new project, at a value of $4.25 million. The external accountants have advised the CFO to use the 7 yr class table in MACRS to depreciate the equipment. The CFO is conducting some simulations regarding the tax impact if the equipment is sold at varying dates during the project's life. The applicable tax rate is 21%. One simulation involves sale of the equipment for $1.5 million at the end of year 5; the other calls for sale of the equipment at the end of year 6 for $375,000. The BV at the end of year 5 is $ and the NSCF is $ The BV at the end of year 6 is $ and the NSCF is $ Use the table below. ALL ANSWERS WITH COMMAS AND ROUNDED TO TWO DECIMAL PLACES. 7-year Year 14.29% 1 24.49% 2 17.49% 3 12.49% 4 8.93% 5 8.926 6 8.93% 7 4.4696 8

Answer 1

Book value at the end of Year 5 = Purchase cost – Depreciation for 5 years

= 4,250,000*(100-14.29-24.49-17.49-12.49-8.93)%

= $948,175

Gain from Sale = 1,500,000 – 948,175 = $551,825

NSCF = 1,500,000 – 551,825*21%

= $1,384,116.75

BV at the end of Year 6 = $569,075

Loss on Sale = $194,075

Hence, there will be tax savings

NSCF = 375000 + 194075*21%

= $415,755.75