Question

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.

Answer 1

Earthmoving Equipment Company

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

(a) Straight line method

Step-by-step 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