A profitable company making earthmoving equipment is considering an investment o
ID: 1099601 • Letter: A
Question
A profitable company making earthmoving equipment is considering an investment of $100,000 in a truck that will have a five-year useful life. It expects to sell the truck after five years for a salvage value of $20,000.
a) Calculate the depreciation schedule using Straight-Line depreciation and a five-year depreciable life
b) Calculate MACRS depreciation using the MACRS tables, noting that the truck has a five-year useful life
c) After three years, what would be the book value of the truck using SL depreciation, and what would it be using MACRS Depreciation?
d) Recognizing that a lower book value means more depreciation has been claimed, and depreciation results in tax savings, which would be the company
Explanation / Answer
a)
Straight line depreciation d per year = V-Vs/n V=$100,000 salvage value Vs= $20,000 n= 5 years
d=(100,000-20,000)/5=$16,000
In Straight line method depreciation is equal for all years.Below is the depreciation schedule table
Year depreciation
1 $16000
2 $16000
3 $16000
4 $16000
5 $16000
b) Depreciation rates for 5 year MACRS are the following 0.2,0.32,0.192,0.1152,0.1152,0.0576
Year
MACRS Calculation
Amount
1
100,000 * .20
$20000
2
100,000*.32
$32000
3
100,000 *.192
$19200
4
100,000*.1152
$11520
5
100,000*.1152
$11520
6
100,000*.0576
$5760
c)
After 3 years book value when striaght line depreciation is used = $100,000-3*$16,000=$52,000
when MACRS is used book value = $100,000-$20000-$32000-$19200=$28,800
d)From the tables in a,b we can see that in MACRS more depreciation is claimed than in case of straight line depreciation.The more depreciation claimed the more advantage to us because the tax that we need to pay is less when we report more depreciation to the govt so the MACRS method is prefrable
Year
MACRS Calculation
Amount
1
100,000 * .20
$20000
2
100,000*.32
$32000
3
100,000 *.192
$19200
4
100,000*.1152
$11520
5
100,000*.1152
$11520
6
100,000*.0576
$5760
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