MACRS
Year 1 Year 2 Year 3 Year 4 Year 5 - Year 6
Depreciation Rate 20%
32% 19.2% 11.52% 11.52% 5.76%
A company invests $27,776 in new machinery, which was depreciated using the five-year MACRS schedule shown above. If the company sold the machinery immediately after the end of year 3 for $14,939, what is the after-tax salvage value from the sale, given a tax rate of 40%? Enter your answer in dollars and round to the nearest dollar.

To calculate the **after-tax salvage value** from the sale of the machinery, we need to follow these steps:

1. **Calculate the total depreciation** over the first 3 years using the MACRS rates.
2. **Determine the book value** of the machinery after 3 years.
3. **Compute the gain or loss** on the sale.
4. **Determine the tax impact** of the sale.
5. **Calculate the after-tax salvage value**.

### Step 1: Total depreciation over the first 3 years
The depreciation rates for the first three years are:

- Year 1: 20%
- Year 2: 32%
- Year 3: 19.2%

So, the total depreciation is:

\[
\text{Total Depreciation} = 20\% + 32\% + 19.2\% = 71.2\%
\]

Now, apply this to the initial cost of the machinery, which is $27,776:

\[
\text{Depreciation Amount} = 71.2\% \times 27,776 = 19,769.47
\]

### Step 2: Book value after 3 years
The **book value** of the machinery after 3 years is the original cost minus the total depreciation:

\[
\text{Book Value} = 27,776 - 19,769.47 = 8,006.53
\]

### Step 3: Gain or loss on the sale
The company sells the machinery for $14,939, which is greater than the book value of $8,006.53. This results in a **gain**:

\[
\text{Gain} = 14,939 - 8,006.53 = 6,932.47
\]

### Step 4: Tax impact
The tax on the gain is calculated using the tax rate of 40%:

\[
\text{Tax on Gain} = 40\% \times 6,932.47 = 2,772.99
\]

### Step 5: After-tax salvage value
The after-tax salvage value is the sale price minus the tax on the gain:

\[
\text{After-tax Salvage Value} = 14,939 - 2,772.99 = 12,166
\]

So, the **after-tax salvage value** is **$12,166**.

Would you like more details on any part of the calculation?

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Here are some related questions to expand on this:

1. How does MACRS depreciation differ from straight-line depreciation?
2. What impact does a higher or lower tax rate have on the after-tax salvage value?
3. How would the after-tax salvage value change if the machine was sold for a loss?
4. What are the key differences between book value and market value in asset sales?
5. How does the sale of a fully depreciated asset affect financial statements?

**Tip:** When calculating depreciation, always ensure you apply the correct depreciation method and rates for the specific asset class according to tax regulations.

A company invests $27,776 in new machinery, which was depreciated using the five-year MACRS schedule shown above. If the company sold the machinery immediately after the end of year 3 for $14,939, what is the after-tax salvage value from the sale, given a tax rate of 40%? Enter your answer in dollars and round to the nearest dollar.

Learn how to calculate the after-tax salvage value of machinery depreciated using MACRS rates, with a detailed step-by-step solution. Includes depreciation rates, book value calculation, tax on gain, and after-tax salvage value computation. The problem involves key concepts like depreciation, tax calculation, and financial gain.

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