Question

You want to invest some amount of money at a 5% interest rate that will yield three annual payments of $10,000 at the end of year 1, $10,000 at the end of year 2, and $10,000 at the end of year 3. How much money do you need to invest today to generate these cash flows. On the last day of the year, a piece of equipment was sold for $34,000 cash. The equipment was purchased three years ago for $60,000. At the time of purchase it had an estimated salvage value of $10,000 and an estimated useful life of 5 years. Solve for: Depreciation expense for year 3, Net book value at time of disposal, Gain or loss on disposal Identify the $ amount of the gain/loss and state whether it was a gain or loss.

Answer 1

Solution 1:

Amount to be invested = Present value of cash flows required = $10,000 * Cumulative PV factor at 5% for 3 periods

= $10,000 * 2.72325 = $27,233

Solution 2:

Depreciation expense for year 3 = (Cost - Salvage value)/ useful life = ($60,000 - $10,000) / 5 = $10,000

Net book value at the time of disposal = Cost - Accumulated depreciation = $60,000 - ($10,000*3) = $30,000

Gain or loss on disposal = Sale value - Net book value = $34,000 - $30,000 = $4,000 Gain