ENGR 5010: Engineering Cost Estimation and Financial Analysis, Fall ‘17

Homework Problem Set 5

• Solve Problem 11-25

The XYZ Block Company purchased a new office computer and other depreciable computer hardware for \$12,000. During the third year, the computer is declared obsolete and donated to the local community college. Using an interest rate of 10%, calculate the PW of depreciation deductions. Assume that no salvage value was initially declared and that the machine was expected to last 5 years.

• Straight-line depreciation

\$12000/5=\$2400

Present value =2400* ((1 – (1 / (1 + 0.1) ^ 0.1)) / 0.1)= \$9097.8882

• SOYD method

1+2+3+4+5=15

 Year Deprciation expense Present value of depreciation 1 5/15*12000= 4000 4000/1.1ˆ1=3636.37 2 4/15*12000=32000 3200/1.1ˆ2=2644.63 3 3/15*12000=2400 2400/1.1ˆ3=1803.16 4 2/15*12000=1600 1600/1.1ˆ4=1092.82 5 1/15*12000=800 800/1.1ˆ5   =    496.74 Total         = 9673.72

Engineering Cost Estimation and Financial Analysis

• MACRS depreciation
 Year Rate Depreciation Present value of depreciation 1 0.2 12000*0.2=2400 2400/1.1ˆ1=2181.81 2 0.32 12000*0.32=3840 3840/1.1ˆ2=3173.55 3 0.192 12000*0.192=2304 2304/1.1ˆ3=1731.03 4 0.1152 12000*0.1152=1382.4 1382.4/1.1ˆ4=944.20 5 0.1152 12000*0.1152=1382.4 1382.4/1.1ˆ5=858.36 6 0.0576 12000*0.0576=691.2 691.2/1.1ˆ6=390.16 Total=9279.11

• DDB method

2400/12000*100=20%*2= 40%

 Year Net book value at beginning Depreciation Net book value at the end of year Present value 1 12000 12000*0.4=4800 7200 4800/1.1ˆ1=4363.64 2 7200 7200*0.4=2880 4320 2880/1.1ˆ2=2380.166 3 4320 4320*0.4=1728 2592 1728/1.1ˆ3=1298.27 4 2592 2592*0.4=1036.8 1555.2 1036.8/1.1ˆ4=708.15 5 1555.2 1555.2*0.4=622.08 933.12 622.08/1.1ˆ5=386.26 Total= 9136.486

Engineering Cost Estimation and Financial Analysis

• Which method is preferred for determining this firm’s taxes?

SOYD is preferred in calculating firm’s taxes since it gives the highest value of depreciation which is useful in reducing tax that a company pays.

• Which method is preferred for determining firm’s value?

The straight-line depreciation method is preferred since it gives the firm the highest value.

• Is using two accounting methods an ethical practice?

Yes using two accounting methods is unethical since it diverts from consistency in preparation of books of accounts, which is a key factor in accounting.

• Solve Problem 11-42

1. Depreciation rate =0.25×2=0.5= 50%

First year dep= 10000*50/100=5000

End of year 1 book value= 10000-5000=5000

2nd year dep= 5000*50/100= 25000

Therefore 2nd year dep charge= \$2500

1. Depreciation in 2nd year= 1000*3/(4+3+2+1)= \$3000
2. Modified accelerated cost recovery system

Dep in second year= 10000*44.45= 4450

• Solve Problem 11-51

 Year Current depreciation Accumulated depreciation Book Value 0 85000 1 85000×0.20=17000 17000 68000 2 85000×0.32=27200 44200 40800 3 85000×0.1920=16320 60520 24480 4 85000×0.1152=9792 70312 14688 5 85000×0.1152=9792 80104 4896 6 85000×0.0576=4896 85000 0 7 0 0 0 8 0 0 0

1. Book value after four years

= 14688

1. Depreciation for 6th year

=4896

1. Book value after 8 years

=0

1. Book value after 2 years

=40800

1. Sum of depreciation through 5th year

=80104

1. Book value after 3rd year

=24480

1. Book value after 8th year

=15000