# book value error for capital budgeting questions

on page 47 on schweser for #4 when calculating Terminal year’s cash flow, shouldn’t you use 5- year MACRS to determine the book value of the asset at the end? On Table 1 it is 6% at year 6. On the answer though, schweser assumes no book value as it does (10,000 - 0)* tax my personal feeling is that it should be (10,000 - (.06*60k)), which reflects the book value. any takers?

Not on schweser , but 5-year MACRS means 6 years beause depreciation starts at mid of first year and ends mid year of the next year after end year.

iregula, first off, its pg 47 in book 3. secondly, the problem says that the asset is sold at the END of its 6th year. at the end of yr 6, the book value is zero because the machine has already depreciated 20 + 32 + 19 + 12 + 11 + 6 = 100% so schweser is correct to use zero as the book value. had the machine been sold at the end of year 1 for example, the book value that would be used in the formula u have above would be T(10,000 - 0.8 x 60,000) because 80% has still not been depreciated.

ok, thanks