To calculate the after-tax salvage value of the equipment, we first need to determine the book value of the equipment at the end of Year 4.
The depreciation method is not specified, so we cannot determine the exact calculation. However, an accelerated depreciation method typically uses a higher depreciation expense in the early years and gradually reduces it over time.
Let's assume a simple scenario where the depreciation expense is the same each year. In this case, the annual depreciation expense can be calculated by dividing the initial cost of the machinery by the four-year useful life:
Depreciation Expense = $300,000 / 4 = $75,000 per year
After four years, the total accumulated depreciation can be calculated by multiplying the annual depreciation expense by the number of years:
Accumulated Depreciation = $75,000 * 4 = $300,000
The book value of the equipment at the end of Year 4 is the initial cost minus the accumulated depreciation:
Book Value = $300,000 - $300,000 = $0
Now, we can calculate the after-tax salvage value:
After-Tax Salvage Value = Salvage Value - (Tax Rate * (Salvage Value - Book Value))
After-Tax Salvage Value = $52,000,000 - (0.40 * ($52,000,000 - $0))
After-Tax Salvage Value = $52,000,000 - (0.40 * $52,000,000)
After-Tax Salvage Value = $52,000,000 - $20,800,000
After-Tax Salvage Value = $31,200,000
Therefore, the after-tax salvage value of the equipment at the end of Year 4 is $31,200,000.
For a new project, Armstead Inc. had planned on depreciating new machinery that costs $300,000 on an accelerated basis according to the following depreciation schedule: The project for which the machinery has been purchased ends in four years, and as a result the machinery is going to be sold at its salvage value of $52,000,000. Under this accelerated depreciation method, what is the after-tax salvage value of the equipment at the end of Year 4 ? Assume the firm's tax rate is 40%.
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