4. A 120-metric-ton telescoping crane that cost $320,000 is owned by Upper State

Question

4. A 120-metric-ton telescoping crane that cost $320,000 is owned by Upper State Power. Salvage is estimated at $75,000. (a) (5 points) Calculate book values using standard SL depreciation over a 7-year recovery period. (b) (5 points) Calculate book values using MACRS method over a 7-year recovery period. (c) (5 points) Explain how the salvage value is treated in MACRS. (d) (5 points) Assume annual NCF of $50,000 each year. Calculate the CFAT using SL method for depreciation. Assume federal tax rate of 35% per year and state tax rate of 8.5% per year.

Explanation / Answer

7 year MACRS depreciation Year Purchase price Depreciation rate Depreciation expense Accumulated depreciation Book value 1 320000 14.29% 45728 45728 274272 2 320000 24.49% 78368 124096 195904 3 320000 17.49% 55968 180064 139936 4 320000 12.49% 39968 220032 99968 5 320000 8.93% 28576 248608 71392 6 320000 8.92% 28544 277152 42848 7 320000 8.93% 28576 305728 14272 Book value as per staright line depreciation Depreciation per year = $320000-$75000/7 = $35000 per year Year Purchase price Depreciation expense Accumulated depreciation Book value 1 320000 35000 35000 285000 2 320000 35000 70000 250000 3 320000 35000 105000 215000 4 320000 35000 140000 180000 5 320000 35000 175000 145000 6 320000 35000 210000 110000 7 320000 35000 245000 75000 Year Book value as per MACRS Book value as per SLM 1 274272 285000 2 195904 250000 3 139936 215000 4 99968 180000 5 71392 145000 6 42848 110000 7 14272 75000 b) Under MARCS depreciation, the concept of salvage value doesn’t exist as the equipment is depreciation 1 year more than the prescribed year to completely depreciate the asset

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