4· 10)points) Cisco Systems is purchasing a new bar code-scanning device for its

Question

4· 10)points) Cisco Systems is purchasing a new bar code-scanning device for its service center in San Francisco. The table that follows lists the relevant cost items for this purchase. The operating expenses for the new system are $10,000 per year, an the useful life of the system is expected to be five years. The SV for depreciation purposes is equal to 25% of the hardware cost. Cost Item Cost Hardware $160,000 Training $15,000 Installation $15,000 a. What is the BV of the device at the end of year three if the SL depreciation method is used? b. Suppose that after depreciating the device for two years with the SL method, the firm decides to switch to the double declining balance depreciation method for the remainder of the device's life (the remaining three years). What is the device's BV at the end of four years?

Explanation / Answer

PART-1) B (Cost basis) = $160,000 + $15,000 + $15,000 = $190,000

Salvage value = 160,000 *25% = $40,000

Yearly depreciation: $190,000 - $40,000 / 5 years = 30,000

BV at end of year 3 = 190,000 - 30,000 * 3 years = $100,000

PART-2) BV2 = $190,000 - 2*$30,000 = $130,000

R=2/3 for DDBM

BV 4 year = $130,000 (1-2/3)^4-2 = $14,444.44

But is is lesser than $40,000

Thus BV3 = $130,000 (1-2/3)^3-2 = $43,333

Thus d4th year = $43,333.33 $40,000 = $3,333.33

or, BV4th year = $40,000.

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