Question

The FOURX Corp. has purchased $50,000 of experimental equipment. The anticipated salvage value is $5500 at the end of its 5-year depreciable life. This profitable corporation is considering two methods of depreciation: straight-line and double declining balance. If it uses 10% interest in its comparison, which method do you recommend?

a. NPW(SL): $37,908; NPW(DDB): $37,068; Recommendation: SL
b. NPW(SL): $33,738; NPW(DDB): $37,068; Recommendation: DDB
c. NPW(SL): $33,738; NPW(DDB): $26,551; Recommendation: SL
d. NPW(SL): $33,738; NPW(DDB): $38,069; Recommendation: DDB

Answer 1

b. NPW(SL): $33,738; NPW(DDB): $37,068; Recommendation: DDB

Step-by-step explanation:

The computation is shown below:

As we know that

Present value is

= [Cash Flow ÷ (1 + Rate of Interest)^Year]

where,

Rate of Interest = 10%

Under Straight-line depreciation:

Beginning book value = $50,000

Salvage value = $5,500

So, the depreciationper year is

= [($50,000 - $5,500) ÷ 5]

= $8,900

Year Beginning Depreciation End Present value

book value book value of depreciation

1 $50,000 $8,900 $41,100 $8,090.91

2 $41,100 $8,900 $32,200 $7,355.37

3 $32,200 $8,900 $23,300 $6,686.70

4 $23,300 $8,900 $14,400 $6,078.82

5 $14,400 $8,900 $5,500 $5,526.20

$33,738.00

Under Double declining depreciation:

Depreciation rate per year = (1 ÷ Useful Life) × 100

= 1 ÷ 5 × 100

= 20%

Now for double-declining, the rate is doubled

So,

= 20% × 2

= 40%

Year Beginning Depreciation End Present value

book value book value of depreciation

1 $50,000 $20,000 $30,000 $18,181.82

2 $30,000 $12,000 $18,000 $9,917.36

3 $18,000 $7,200 $10,800 $5,409.47

4 $10,800 $4,320 $6,480 $2,950.62

5 $6,480 $980 $5,500 $608.50

$37,068