The used equipment will cost $105,000 with another $15,000 required to install t

Question

The used equipment will cost $105,000 with another $15,000 required to install the equipment.

The equipment is projected to have an economic life of three years with a salvage value of $9,000. The

equipment will provide the capacity to blend an additional 800,000 gallons annually. The variable

blending cost is estimated to be $.20 per gallon. The equipment will be depreciated under the Modified

Accelerate Cost Recovery System (MACRS) 3-year class. Under the current tax law, the depreciation

allowances are 0.33, 0.45, 0.15, and 0.07 in years 1 through 4, respectively. The increased sales volume

will require an additional investment in working capital of 2% of sales (to be on hand at the beginning

of the year).

please explain why the depreciation expense is 39600 and not 39996

Explanation / Answer

As per the IRS rules and table for Depreciation, the rate of Depreciation for the first year should be 33.33%, which for the question has been rounded off to 0.33.
Hence, if you multiply the cost of equipment +installation cost with 33.33%, it will result in depreciation of 39996 for the first year.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.