Answer:
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
