Question

11-25 The XYZ Block Company purchased a new office computer and other depreciable computer hardware for $4800. During the third year, the computer is declared obsolete and is donated to the local comrnu- nity college. Using an interest rate of 15%, calculate the PW of the depreciation deductions. Assume that no salvage value was initially declared and that the machine was expected to last 5 years.

Answer 1

Answer:

XYZ Company

The PW (Present Worth) of depreciation deductions is $1,560.96

Explanation:

a) Data and Calculations:

Cost of Equipment = $4,800

Equipment's useful life = 5 years

Interest rate = 15%

Depreciation expense per year = $4,800/5 = $960

The asset was depreciated for two years, with Accumulated Depreciation totaling $1,920 (depreciation deductions).

Discounting $960 for two years, the present worth (present value) of the deductions = annual depreciation expense multiplied by present value annuity factor

=$960 * 1.626

= $1,560.96

b) The asset would have been depreciated for 5 years, but was declared obsolete during the third year.  This means that it was only in use for 2 years.  Therefore, in calculating the PW of the depreciation deductions, the annual depreciation expense of $960 is discounted to its present value using a present value annuity factor.