Question

A clearing contractor purchases a dozer with a delivered price of $275,000. The company believes it can sell the used dozer after 4 yr (2,000 hr/yr) of service for $56,000. There will be no major overhauls. The company’s cost of capital is 9.2%, and its tax rate is 33%. Property taxes, insurance, and storage will run 4%. What is the time value method depreciation part of the ownership cost?

Answer 1

Answer: $86,513

Step-by-step explanation:

The question deals with depreciation of fixed assets (dozer)

The formula for time value method of depreciation of fixed assets = (C − S)/N, where

C = cost of asset

S = scrap value of asset

N = number of economic useful years of assets

Total of cost of fixed assets (dozer): $

Cost on delivery 275,000

Add cost of capital (9.2% x $275,000) 25,300

Tax (33% x $275,000) 90,750

Property taxes, insurance, and storage

cost (4% x $275,000) 11,000

Ownership cost 402,050

Therefore cost of asset C = $402,050

Scrap value S = $56,000

Economic useful life of asset = 4yrs

Using (C − S)/N

Amount of depreciation charged = (402,050 − 56,000)/4

= 346,050/4

= $86,513

Time value depreciation charged on ownership cost is $86,513