1) You are considering two types of equipment for your company, alternative A wi

Question

1) You are considering two types of equipment for your company, alternative A with initial cost of $700,000, annual cost of $40,000 and salvage value of $175,000. Alternative B has an initial cost of $500,000, annual cost of $110,000 and salvage value of $125,000. Both alternatives have useful lives of 5 years. Construct a choice table for interest rates from 0% to 100%. Your company wants a 12% rate of return on the investment. Which alternative should be chosen?

2) Computer the depreciation schedule using the sum-of-year-digits method for the following: Office furniture that costs $50,000 and has zero salvage value at the end of its depreciable life in 10 years.

Explanation / Answer

2)

sum of years depriciation

sum of the digits = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55

year 1 depriciation = 10/55 * 50000 = 9090.91

year 2 depriciation = 9/55 * 50000 = 8181.82

year 3 depriciation = 8/55 * 50000 = 7272.72

year 4 depriciation = 7/55 * 50000 = 6363.64

year 5 depriciation = 6/55 * 50000 = 5454.5

year 6 depriciation = 5/55 * 50000 = 4545.46

year 7 depriciation = 4/55 * 50000 = 3636.36

year 8 depriciation = 3/55 * 50000 = 2727.27

year 9 depriciation = 2/55 * 50000 = 1818.18

year 10 depriciation = 1/55 * 50000 = 909.09

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