Exam 7: Depreciation and Income Taxes

A private metropolitan mass transit system operator wants to add a new trolleybus to its fleet. The following information is prepared for the economic evaluation. Either trolley is to be used for 8 years and sold for the estimated salvage value. The before- tax MARR is 12.31% per year and the effective tax rate is 35%. Using SL depreciation, select a machine on the basis of after- tax annual worth analysis.

A manufacturer of hardboard and fiber cement sidings and panels purchased new equipment for its new product line for $20,000. A declining balance depreciation at a rate of 1.5 times the straight line rate with a 5- year recovery period and an estimated salvage value of $8000 was used to write off the capital investment. The company expects to realize net revenue of $57,000 each year for the next 5 years. However, due to the sudden change in business direction, the company decided to sell the equipment after 2 years of operation for $21,000. Assuming an effective tax of 40% and an after- tax MARR of 12% per year, calculate the future worth of the after- tax cash flow at the end of year 2.

An uninterruptible power system used in a small production facility at Acme Manufacturing has a basis of $56,000 and is expected to have $5750 salvage value after 125,000 hours of use. Calculate the depreciation rate per hour of use and the book value after 77,000 hours of operation.

A machine used in the manufacture of fabricated metal products at Crimson Tide Inc., with a useful life of 12 years, is to be depreciated by the MACRS method for tax depreciation purposes. The machine has a first cost of $23,000 with a $3000 salvage value. The company's controller wants to understand the effects of the difference in the annual depreciation charge for SL and MACRS with GDS recovery period. Using a half- year convention for both methods, determine the differences in the book value if the machine is sold at the end of year 5.

An inspecting and profiling web controller that costs $40,000 has a life of 8 years with a $5000 salvage value. The estimated annual operating and maintenance cost is $3700 per year. Use classical straight line depreciation to determine the annual depreciation at the end of year 5.

A Caribbean cruise line has purchased a new cruise ship for $670,000 and expects to realize a net revenue of $190,000.00 each year for the next 10 years. The estimated salvage value of the ship at the end of its useful life of 10 years is $52,000. Assume an effective federal tax of 40%, state income tax of 10.75% per year, and an after- tax MARR of 14% per year. Calculate the present worth of ATCF if a straight- line depreciation method is used.

A laboratory centrifuge costs $79,000 and has a $5530 salvage value with an 8- year recovery period. The estimated annual operating cost is $7000 per year. Use the double declining balance method with switch over to straight line to tabulate the depreciation schedule at the end of each year.