Question

7. Your company bought a new machine (that will last for 4 years) for $40,000 with a loan from the bank with a 4% interest rate.

a. What is the present discounted value of the depreciation allowance if the company can depreciate the cost of the equipment by equal amounts each year for the expected life of the equipment?

b. What is the PDV of the depreciation allowance if you can depreciate the cost equally over 2 years?

Answer 1

Ans:

Part A ) it is given that the value of machine is $40,000 and it will be depreciated in 4 years. It means that each year $10,000 will be depreciated. Interest rate is 4%. In order to calculate the present value , we need to discount the depreciation with interest rate

Present value = 10000 / ( 1+4%)^1 + 10000/(1+4%)^2 + 10000/ ( 1+4%) ^ 3 + 10000 / (1+4%) ^4 = 9615.38 + 9245.56+ 8889.96 +8548.04 = 36298.95

Part B )

If it will depreciated in 2 years then total depreciable value per year is $20,000.

Present value = 20,000/ (1+4%)^1 + 20,000 / (1+4%)^2 = 19230.76 + 18491.12 = 37721.89

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