Engineering Economics Analysis With steps, not just tables or excel. 11-13 A mac
ID: 1111075 • Letter: E
Question
Engineering Economics Analysis
With steps, not just tables or excel.
11-13 A machine was purchased two years ago for S50,000 and had a depreciable life of five years and no expected salvage value. The owner is considering an offer to sell the machine for $25,000. For each of the depreciation methods listed, fill in the table below to determine the deprecation for year 2, and the book value at the end of year 2. (Assume a five-year MACRS recovery period.) Depreciation End of Year 2 For Year 2 Book Valu Straight-line (SL) Sum-of-years-digits (SOYD) Double declining balance (DDB) Modified accelerated cost recovery system (MACRS)Explanation / Answer
11-13
Straight line depreciation:
Yearly depreciation = (investment – salvage value ) /useful life = (50000-0)/5 = $10000
Then,
Depreciation in year 2 = $10000
Book value after the year 2 = 50000 – 2*10000 = $30000
Sum of years digit method:
Depreciation in year k = I* (n-k+1)/(n*(n+1)/2)
Here,
n = life of the machine
I = investment = $50000
In the given example,
n = 5 years
Hence,
Depreciation in year 1 = 50000*(5-1+1)/(5*(5+1)/2) = $16666.67
Depreciation in year 2= 50000*(5-2+1)/(5*(5+1)/2) = $13333.33
Book value after year 2 = 50000 – (16666.67 + 13333.33) = $20000
Double declining balance method:
Double Declining balance depreciation = 200%*Book value*annual depreciation rate
Initial book value = $50000
Annual depreciation rate = 1/useful life = 1/5 = 20%
Double Declining balance depreciation in year 1 =200% * 50000*20% = $20000
Double Declining balance depreciation in year 2 = 200%*(50000-20000)*20% = $12000
Book value after year 2 = 50000 - (20000+12000) = $18000
MACR Depreciation (Property class is taken as 5 year).
MACRS depreciation for year 2 = 50000*32% = $16000
Book value after year 2 = 50000*(1-20% -32%) = $24000
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