A profitable company making earthmoving equipment is considering an investment of $150,000 on equipment that will have a 5 year useful life and a $50,000 salvage value. Use a spreadsheet function to compute the MACRS depreciation schedule. Show the depreciation taken (=sum ()) as well as the PW of the depreciation charges discounted at the MARR%. If money is worth 10%m which one of the following three methods of depreciation would be preferable? (a) Straight line method), (b) double declining balance method, (c) MACRS method.

Earthmoving Equipment Company

The preferable method of depreciation based on the Present Worth is:

(a) Straight line method

Explanation:

a) Data and Calculations:

Cost of equipment = $150,000

Estimated useful life = 5 years

Salvage value = $50,000

Depreciable amount = $100,000 ($150,000 - $50,000)

Annual Depreciation:

Straight-line method = $20,000 ($100,000/5)

Double-declining-balance method rate = 40% (100%/5 * 2)

Depreciation Schedules:

a) Straight line method

Year      Cost        Depreciation      Accumulated      Net Book Value

                                Expense          Depreciation  

Year 1  $150,000     $20,000             $20,000             $130,000

Year 2 $150,000     $20,000             $40,000              $110,000

Year 3 $150,000     $20,000             $60,000              $90,000

Year 4 $150,000     $20,000             $80,000              $70,000

Year 5 $150,000     $20,000           $100,000              $50,000

b) double declining balance method

Year      Cost        Depreciation      Accumulated      Net Book Value

                                Expense          Depreciation  

Year 1  $150,000    $60,000            $60,000              $90,000

Year 2 $150,000      36,000              96,000                 54,000

Year 3 $150,000       4,000              100,000                 50,000

Year 4 $150,000

Year 5 $150,000

c) MACRS method

Year      Cost        Depreciation      Accumulated      Net Book Value

                                Expense          Depreciation  

Year 1  $150,000    $30,000             $30,000              $120,000

Year 2 $150,000      48,000                78,000                  72,000

Year 3 $150,000      28,800              106,800                  43,200

Year 4 $150,000       17,280              124,080                  25,920

Year 5 $150,000      17,280                141,360                    8,640

Year 6 $150,000       8,640               150,000                    0

Discount rate (MARR) = 10%

PW of Straight-line Depreciation Charges:

PV annual factor = 3.791

PW = $75,820 ($20,000 * 3.791)

PW of Double-declining-balance:

Year 1 = $54,540 ($60,000 * .909)

Year 2 = $29,736 ($36,000 * .826)

Year 3 = $3,004 ($4,000 * .751)

PW =    $87,280

PW of MACRS:

Year 1 = $27,200 ($30,000 * .909)

Year 2 = $39,648 ($48,000 * .826)

Year 3 = $21,629 ($28,800 * .751)

Year 4 = $11,802 ($17,280 * .683)

Year 5 = $10,731 ($17,280 * .621)

Year 6 = $4,873 ($8,640 * .564)

PW =   $115,883

answernaturalistic observation;

answerreactive approach;