Question

An asset will cost $1,750 when purchased this year. It is further expected to have a salvage value of $250 at the end of its five year depreciable life. Calculate complete depreciation schedules giving the depreciation charge, D(n), and end-of-year book value, B(n), for straight-line (SL), Declining Balance (DB) with a rate of d=0.25, double declining balance (DDB), and modified accelerated cost recovery (MACRS) depreciation methods. Assume a MACRS recovery period of 5 years with the following depreciation rates.

Year	1	2	3	4	5	6
d (MACRS)	0.2	0.32	0.192	0.1152	0.1152	0.0576

B. check which of the four methods provides the maximum present worth?

C. If the owner starts the depreciation process using DDB depreciation method at which year the owner should switch to straight line method? Justify your response.

i=10%

Answer 1

A)

B)

Considering the discount rate while calculating the present worth, hence, the method in which most of the depriciation is done in the initial phase as compared to later stage will have maximum present worth. Hence, Double Declining Balance method provides maximum present worth.

C)

The year in which Depriciation value of DDB is less than SL, DDB Method should be switched to SL method.

In this question it is 3.25 years.