Edward's Manufactured Homes purchased some machinery 2 years ago for $50,000. The assets are classified as 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for $15,000 to a foreign firm for use in its production facility in South America. What is the aftertax salvage value from this sale if the tax rate is 34 percent?

Question

Edward's Manufactured Homes purchased some machinery 2 years ago for $50,000. The assets are classified as 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for $15,000 to a foreign firm for use in its production facility in South America. What is the aftertax salvage value from this sale if the tax rate is 34 percent?

Answer 1

To determine the aftertax salvage value from the sale of the old machines, we first need to calculate the capital gain or loss on the sale.

The capital gain or loss is the difference between the selling price and the adjusted basis of the asset. The adjusted basis is the original cost of the asset minus any accumulated depreciation.

In this case, the original cost of the machinery is $50,000. Since the assets are classified as 5-year property for MACRS, we need to determine the accumulated depreciation over the 2 years.

MACRS depreciation for 5-year property is calculated using the double-declining balance method. The annual depreciation rate for 5-year property is 20% (100%/5 years). Since 2 years have passed, we can calculate the accumulated depreciation as follows:

Accumulated Depreciation = (Original Cost) × (Depreciation Rate) × (Number of Years)
= $50,000 × 20% × 2
= $20,000

Therefore, the adjusted basis of the machinery is $50,000 - $20,000 = $30,000.

Now, let's calculate the capital gain or loss:

Capital Gain or Loss = Selling Price - Adjusted Basis
= $15,000 - $30,000
= -$15,000

Since the capital gain is negative, indicating a loss, we can skip the taxation calculation for the capital gains tax.

Now we can calculate the aftertax salvage value:

Aftertax Salvage Value = Selling Price - Capital Gains Tax

To calculate the capital gains tax, we multiply the capital gain by the tax rate:

Capital Gains Tax = Capital Gain × Tax Rate
= (-$15,000) × 34%
= -$5,100

Therefore, the aftertax salvage value is:

Aftertax Salvage Value = $15,000 - (-$5,100)
= $20,100

So, the aftertax salvage value from this sale is $20,100.