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Amiraneli [1.4K]
2 years ago
5

A profitable company making earthmoving equipment is considering an investment of $150,000 on equipment that will have a 5 year

useful life and a $50,000 salvage value. Use a spreadsheet function to compute the MACRS depreciation schedule. Show the depreciation taken (=sum ()) as well as the PW of the depreciation charges discounted at the MARR%. If money is worth 10%m which one of the following three methods of depreciation would be preferable? (a) Straight line method), (b) double declining balance method, (c) MACRS method.
Business
1 answer:
Anuta_ua [19.1K]2 years ago
8 0

Answer:

Earthmoving Equipment Company

The preferable method of depreciation based on the Present Worth is:

(a) Straight line method

Explanation:

a) Data and Calculations:

Cost of equipment = $150,000

Estimated useful life = 5 years

Salvage value = $50,000

Depreciable amount = $100,000 ($150,000 - $50,000)

Annual Depreciation:

Straight-line method = $20,000 ($100,000/5)

Double-declining-balance method rate = 40% (100%/5 * 2)

Depreciation Schedules:

a) Straight line method

Year      Cost        Depreciation      Accumulated      Net Book Value

                                Expense          Depreciation  

Year 1  $150,000     $20,000             $20,000             $130,000

Year 2 $150,000     $20,000             $40,000              $110,000

Year 3 $150,000     $20,000             $60,000              $90,000

Year 4 $150,000     $20,000             $80,000              $70,000

Year 5 $150,000     $20,000           $100,000              $50,000

b) double declining balance method

Year      Cost        Depreciation      Accumulated      Net Book Value

                                Expense          Depreciation  

Year 1  $150,000    $60,000            $60,000              $90,000

Year 2 $150,000      36,000              96,000                 54,000

Year 3 $150,000       4,000              100,000                 50,000

Year 4 $150,000

Year 5 $150,000

c) MACRS method

Year      Cost        Depreciation      Accumulated      Net Book Value

                                Expense          Depreciation  

Year 1  $150,000    $30,000             $30,000              $120,000

Year 2 $150,000      48,000                78,000                  72,000

Year 3 $150,000      28,800              106,800                  43,200

Year 4 $150,000       17,280              124,080                  25,920

Year 5 $150,000      17,280                141,360                    8,640

Year 6 $150,000       8,640               150,000                    0

Discount rate (MARR) = 10%

PW of Straight-line Depreciation Charges:

PV annual factor = 3.791

PW = $75,820 ($20,000 * 3.791)

PW of Double-declining-balance:

Year 1 = $54,540 ($60,000 * .909)

Year 2 = $29,736 ($36,000 * .826)

Year 3 = $3,004 ($4,000 * .751)

PW =    $87,280

PW of MACRS:

Year 1 = $27,200 ($30,000 * .909)

Year 2 = $39,648 ($48,000 * .826)

Year 3 = $21,629 ($28,800 * .751)

Year 4 = $11,802 ($17,280 * .683)

Year 5 = $10,731 ($17,280 * .621)

Year 6 = $4,873 ($8,640 * .564)

PW =   $115,883

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