McPherson Company Must Purchase a New Milling Machine

question 54

Multiple Choice

McPherson Company must purchase a new milling machine. The purchase price is $50,000, including installation. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

• A) $8,878
• B) $9,345
• C) $9,837
• D) $10,355
• E) $10,900

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Definitions:

WACC

Weighted Average Cost of Capital, a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.

Appropriate Discount Rate

The rate used to discount future cash flows to their present value to account for risk and time value of money, reflecting the opportunity cost of capital.

Interest Rate

The share of a loan incurred as interest costs to the borrower, habitually depicted as an annual percentage of the loan's outstanding amount.

Marginal Tax Rate

The rate at which the last dollar of income is taxed, indicating the proportion of any additional dollar of income that must be paid in taxes.