Last month, HighPower, which specializes in wind power plant design and engineering, made a capital investment of $400,000 in physical simulation equipment that will be used for at least 5 years, then sold for approximately 25% of the first cost. By law, the assets are MACRS depreciated using a 3-year recovery period. By how much will the sale cause HighPower’s TI and taxes to change in year 5 if the federal tax rate is 35% and the state tax rate is 6.5%?
What will be an ideal response?
TI will increase by DR, since MACRS BV5 = 0
?TI = DR = SP – BV5 = 0.25(400,000) – 0 = $100,000
Taxes will increase by ?TI(Te) = 100,000Te
Te = 0.065 + (1 - 0.065)(0.35) = 0.39225
Tax increase = 100,000(0.39225) = $39,225
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