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Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)

	a.	$5,734
	b.	$6,023
	c.	$6,324
	d.	$6,640
	e.	$6,972

ANSWER:

a

Life of equipment: 3 Tax rate: 20% Loan amount = equipment cost: $100,000 Maintenance costs: $3,000 Interest rate, simple: 10.0% Salvage value: $30,000 Lease Pmt: $29,000 Loan Analysis: 0 1 2 3 Totals MACRS factor 0.3333 0.4445 0.1418 0.9196 Depreciation 33,330 44,550 14,180 91,960 Loan repayment 100,000 Interest 10,000 10,000 10,000 Int tax saving (Interest T) 2,000 2,000 2,000 Maintenance 3,000 3,000 3,000 Maint. tax saving (Maint. T) 600 600 600 Depr'n tax saving (Deprn T) 6,666 8,890 2,836 Net operating CF 2,400 3,734 1,490 105,164 Salvage value before taxes 30,000 Book value (Cost Total dep'rn) 8,040 Taxable salvage value 21,960 Tax on salvage value 4,392 Salvage value after taxes 25,608 Total Net CF 2,400 3,734 1,510 79,556 PV cost at I(1 T) = 8.00% 70,306 Lease Analysis: 0 1 2 3 Lease payment 29,000 29,000 29,000 Tax saving on pmt 5,800 5,800 5,800 0 Net cost of lease 23,200 23,200 23,200 0 PV cost of leasing at I(1 T) 64,572 NAL = $5,734

I have the answer i just don't understand how they obtained book value 8040, can you please explain how to get the salvage value after tax 25,608......can you show the math calculation of it even the basic small calculation

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