Question

A construction company is considering buying a piece of excavation equipment for $70,000 in cash, with...

A construction company is considering buying a piece of excavation equipment for $70,000 in cash, with a 5 year useful life and salvage value of $15,000. Maintenance will be $10,000 in the first year and increase 3% per year, the company has an MARR of 10%, and the effective tax rate is 30%. Assume that the company can write off depreciation (that is, these costs can be deducted from taxable income).

1.What is the book value of the asset after 3 years, assuming straight line depreciation?

2.Repeat part a but with double-declining balance depreciation.

3.Now use the switch-over (VDB) method for depreciation. In which year should you switch to straight-line depreciation?

4.Again assuming straight line depreciation, what annual revenue resulting from the equipment must the equipment generate to be a worthwhile investment?

5.Suppose revenues from the equipment are $50,000 per year. Calculate the NPV.

Homework Answers

Answer #1
1)
Depreciation per year = ($70,000 - $15,000)/5 $ 11,000.00
Book Value after 3 years = $70,000 - (11000 x 3 ) $ 37,000.00
2)
Double decline balance Dep. = 1/5 x 2 40%
Year Beginng Bal. Dep. Ending Bal
1 70000 28000 42000
2 42000 16800 25200
3 25200 10080 15120
3) VDP
Year Beginng Bal. Dep. Ending Bal
1 70000 $ 28,000.00 42000
2 42000 $ 16,800.00 25200
3 25200 $ 10,080.00 15120
4 15120 $      120.00 15000
5 15000 $             -   15000
Year 3 It only switches to Straight Line calculation when Depreciation Value, Straight Line is higher than Depreciation Value, DDB.
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A construction company is considering buying a piece of excavation equipment for $70,000 in cash, with...
A construction company is considering buying a piece of excavation equipment for $70,000 in cash, with a 5 year useful life and salvage value of $15,000. Maintenance will be $10,000 in the first year and increase 3% per year, the company has an MARR of 10%, and the effective tax rate is 30%. Assume that the company can write off depreciation (that is, these costs can be deducted from taxable income). 1.What is the book value of the asset after...
Modella Construction Company is considering buying a new piece of equipment to use in their business:...
Modella Construction Company is considering buying a new piece of equipment to use in their business: Cost of equipment……………………………………….. $10,000 Annual net cash inflows…………………………………. $2,800 Working Capital required…………………………..……. $5,000 Salvage value of equipment ………………….…………. $1,000 Life of the equipment …………………………….……… 8 years Discount rate ……………………………………………… 10% At the completion of 8 years, the working capital will be released for use elsewhere. Compute the net present value of the equipment, and state if they should buy the equipment or not. Show...
Assume that a company is considering buying a new piece of equipment for $280,000 that would...
Assume that a company is considering buying a new piece of equipment for $280,000 that would have a useful life of five years and a salvage value of $30,000. The equipment would generate the following estimated annual revenues and expenses: Revenues $ 120,000 Less operating expenses: Commissions $ 15,000 Insurance 5,000 Depreciation 50,000 Maintenance 30,000 100,000 Net operating income $ 20,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided....
On January 1 of Year 1, Mary Company purchased a piece of equipment for $200,000. The...
On January 1 of Year 1, Mary Company purchased a piece of equipment for $200,000. The estimated life of the equipment is 5 years. Mary estimates that the equipment can be sold for $60,000 at the end of its life.Harry Company uses double-declining balance depreciation. For Year 2 (the SECOND year), Mary Company’s net income was $100,000. What would Mary Company’s net income have been in Year 2 (the SECOND year) assuming that Mary Company had initially (on January 1,...
The ABC Co. purchased a piece of equipment for its factory for the price of $990,000....
The ABC Co. purchased a piece of equipment for its factory for the price of $990,000. The Company paid an additional $7,000 in transportation expenses to transport the equipment to its factory and an additional $28,000 to install the equipment in its assembly line. The equipment was estimated to have a useful life of 5 years and a salvage value at the end of the 5 years of $90,000. REQUIRED: Complete the depreciation tables below to show the the annual...
Calculate depreciation. A piece of construction equipment cost $2,000,000 when UGACo purchased it on April 1,...
Calculate depreciation. A piece of construction equipment cost $2,000,000 when UGACo purchased it on April 1, 2014. Its estimated salvage value is $400,000 and its expected life is eight years. Instructions (1) Calculate the depreciation expense (to the nearest dollar) by each of the following methods, showing the figures used. (a) Straight-line for 2014 (b) Double-declining balance for 2015 (c) Sum-of-the-years'-digits for 2015 (2) Which method would result in the smallest income amount for 2015?
On January 1, 2021, THE Company purchased a piece of equipment that cost $160,000. The equipment...
On January 1, 2021, THE Company purchased a piece of equipment that cost $160,000. The equipment had a ten year life and a $28,000 salvage value assigned to it. THE Company will depreciate the equipment using the straight-line depreciation method. On January 1, 2025, THE Company determined the life of the equipment should be revised from 10 to 16 years. Calculate the depreciation expense recorded on the equipment for 2025.
1. Cardillo Corp is considering buying a new piece of manufacturing equipment. The new piece of...
1. Cardillo Corp is considering buying a new piece of manufacturing equipment. The new piece of equipment will increase their ability to manufacture widgets by 11,000 units per year. They sell widgets for $31 per unit, and the cost of goods sold per unit (consider this as cash) is $17 per unit. Additionally, Cardillo Corp will have to pay cash for the additional costs associated with this new equipment per year: $20,000 for utilities, $4,500 for maintenance costs, and $61,500...
Sunland Company is considering the replacement of a piece of equipment with a newer model. The...
Sunland Company is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $312000 $512000 Accumulated depreciation 124800 - 0 - Annual operating costs 411000 354000 If the old equipment is replaced now, it can be sold for $85000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. The company uses straight-line depreciation with a zero salvage value for...
A construction company wants to buy or lease some new office equipment. The office equipment could...
A construction company wants to buy or lease some new office equipment. The office equipment could be purchased for $8500 now and pay a monthly maintenance fee of $75 per month. The second option would be leasing the equipment for $800 per month with no maintenance fee. The company uses a 15%/year hurdle rate (MARR) compounded monthly. a) What is the breakeven in number of months between the two options? b) If the study period for the analysis is 1...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT