A contractor acquires truck-mounted concrete pumping equipment. Owing to the ini

Question

A contractor acquires truck-mounted concrete pumping equipment. Owing to the initial and operating costs, the contractor is in doubt as to the preferred method for charging depreciation. The contractor considers three methods: straight line, MACRS, and units of production. The facts are as follows: initial cost, $1,460,000; useful life 10 years, and a 20% salvage value. Production output starts at 200 yd^3/hr for a billing year of 2000 hrs. It is estimated that the pumping rate will decline 10yd^3/hr each year. For the data, plot the book value of the asset against time for the methods and select the best choice. Discuss the merits of these allocation schemes. (Hint: The best choice is the minimum book value as time proceeds, thus minimizing taxable income.)

This problem comes from Ostwald, Construction Cost Analysis and Estimating (2001)

Explanation / Answer

staight line method

calculation of rate of depreciation

= 1/ useful life * 100 = 1/10 * 100= 10%

COST OF THE TRUCK= $1460000 - 20%OF $1460000 = $1168000

YEAR STRAIGHT LINE DEP RATE(%) BOOK VALUE AT BEGINNING($) YEARLY DEP 0 10 1460000 1 10 1460000 146000 2 10 1314000 146000 3 10 1168000 146000 4 10 1022000 146000 5 10 876000 146000 6 10 730000 146000 7 10 584000 146000 8 10 438000 146000 9 10 292000 146000 10 10 146000 146000

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