2. WindPower, Inc. designs and commissions the manfacture of a wind powered inve

Question

2. WindPower, Inc. designs and commissions the manfacture of a wind powered inverter-based constant voltage generator for research and experimentation with low-rated, highly variable, wind fields as a form of alternative energy. This unit costs $35,000 plus $3000 for shipping and installation, and is MACRS 5 yr property. After 3 years, WindPower had no further use for the unit and was able to sel it for $2000, s S00 for removal. WindPower had depreciated the generator cost over the 3 vears with an estimated life of $1000 a) What is the total cost basis for this generator? b) What is the net market value actually received after three years? By what amount did the book value differ from the net market value at the end of 3 years if the following depreciation method was used? c) Straight-line depreciation d) Double declining balance depreciation e) MACRS depreciation

Explanation / Answer

a) The total cost basis for this generator is $38,000 (Unit cost = $35,000 and Shipping and installation = $3,000)

b) The net market value actually received ater 3 years is $2,000.

c) Straight-line depreciation

Under straight line depreciation, the net book value at the end of 3 years become 0. The net market value is $2,000. So, the difference between book value and market value is $2,000.

d) Double declining balance depreciation

Double declining balance depreciation is an accelerated form of depreciation under which majority of the depreciation associated with a fixed asset is recognized during the first few years of its useful life. To calculate depreciation under this method, multiply the asset book value at the beginning of the year with twice the rate of Straight Line Method i.e.the rate as per Straight Line method is 33.33% so to calculate depreciation under this method it will be 66.66%.

The net book value is $1,409 and the net market value is $2,000. So, the difference is $591.

Year Net Book value at the beginning Depreciation = 2 * 33.33%* net book value Net book value at the end of the year 1 38000 25,330 12,670 2 12,670 8,445 4,225 3 4,225 2,816 1,409 Total 36,591

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