Chapter 27, Problem 27.4CTF

Winston, Inc., is computing the net advantage to leasing for a new food processing machine. How should the estimated $46,000 of salvage value be handled? The lease is for four years, the tax rate is 35 percent, and the aftertax discount rate is 5.2 percent.

Summary Introduction

To determine: How should the salvage value be handled.

Introduction:

Salvage value: It is the estimated resale value of an asset at the end of useful life. It is computed by deducting the expenditure of the fixed asset to find the asset amount that will be depreciated.

Answer to Problem 27.4CTF

The salvage value can be handled by obtaining after tax salvage value of $29,900 at the end of four years.

Explanation of Solution

Calculate the after tax salvage value:

The estimated salvage value is $46,000, tax rate is 35%, and after tax discount rate is 5.2%.

$\begin{array}{c}\text{After tax salvage value}=\text{Estimated salvage value}\times \left(1-\text{Tax rate}\right)\\ =\$46,000\times \left(1-35\%\right)\\ =\$46,000\times 0.65\\ =\$29,900\end{array}$

Therefore, the after tax salvage value is $29,900.