A company is considering buying a new machine, two different models are avaliabl

Question

A company is considering buying a new machine, two different models are avaliable..

Model 1

Useful life- 20 years

First cost- 80,000$

Salvage Value- 20,000$

Annual Operate Cost- 18,000 (1-20 years)

Model 2

Useful life- 25 years

First cost- 100,000$

Salvage Value- 25,000$

Annual Operate Cost 15,000$ (1-10 years) 20,000$ (11-25 years)

Assuming straight line deprecation, what is the book value of model 2 at the end of year 7?

73k 76k 79k or 82k

Asuming double declining balance deprecation, what is the book value of model 1 at the end of year 3?

64800 58370 52488 or 47239?

Please inlcude all formulas and clear step by step process!

Explanation / Answer

Model 2

Useful life- 25 years

First cost- 100,000$

Salvage Value- 25,000$

Annual Operate Cost 15,000$ (1-10 years) 20,000$ (11-25 years)

Requirement 1: Assuming straight line deprecation, what is the book value of model 2 at the end of year 7?

73k 76k 79k or 82k

As per Straight Line Depreciation Method= First Cost - Salvage Value / Useful Life

=( $100000 -25000) / 25 = $3000

Total depreciation for 7 years = $3000 * 7= $21000

So, the book value of model 2 at the end of year 7 = $100,000 - $21000 = $79,000

Requirement 2:

Asuming double declining balance deprecation, what is the book value of model 1 at the end of year 3?

64800 58320 52488 or 47239?

Model 1

Useful life- 20 years

First cost- 80,000$

Salvage Value- 20,000$

Annual Operate Cost- 18,000 (1-20 years)

So, under double declining balance deprecation, the depreciation per year is charged at double of the Straight Line Method (SLM) (with out taking salvage value). Thus, First Cost of Model 1 = $80,000 & useful life is 20 years, then Depreciation rate per year as per SLM = 80000/20=$4000 i.e. 5% of cost, SO as per double declining balance deprecation, the depreciation rate is 5% * 2=10%.

The book valu of model 1 at the end of year 3 is:

So, at the end of year 3 the book value of model 1 is $58,320

particulars / year depreciation calculation $ Book value $ 0 Firs Cost $80,000 At the end of 1st year Less depreciation @ 10% = 8000 $72000 $72000 At the end of 2nd year Less depreciation @ 10% = 7200 64800 64800 At the end of 3rd year Less depreciation @ 10% = 6480 58320

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