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

Solution :

book value of model 2 at the end of year 7

dep p.a (cost -salvage)/25

3000

Depreciation for 7 year

21000

WDV at the end of 7th year (cost - depreciation till date)

79000

book value of model 1 at the end of year 3

Double declining rate = straight line rate x 2 = .05*2

0.1

straight line rate = 1/useful life = 1/20 =0.05

cost

80000

depreciation for year 1 (80000*.10)

8000

WDV at the end of year 1

72000

depreciation for year 2 (72000*.01)

7200

WDV at the end of year 2

64800

depreciation for year 3 (64800*.01)

6480

WDV at the end of year 3

58320

book value of model 2 at the end of year 7

dep p.a (cost -salvage)/25

3000

Depreciation for 7 year

21000

WDV at the end of 7th year (cost - depreciation till date)

79000

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