A machine was purchased for $100,000. Estimated salvage is $27,000 in 7 years. 3

Question

A machine was purchased for $100,000. Estimated salvage is $27,000 in 7 years. 3 year MACRS depreciation is being used. (33.33, 44.45, 14.81, 7.41). The machine will be kept for 7 years and then sold for $40,000. Calculate the annual equivalent depreciation over the seven year life.A machine was purchased for $100,000. Estimated salvage is $27,000 in 7 years. 3 year MACRS depreciation is being used. (33.33, 44.45, 14.81, 7.41). The machine will be kept for 7 years and then sold for $40,000. Calculate the annual equivalent depreciation over the seven year life.

Step by step solution, the Annual equivalent depreciation is just one value and the annual interest rate must be calculated with the data provided. (Do not use 7 years MACRS)!

Explanation / Answer

Cost Price of the good at the beginning of 1st year (C.P) = $100,000

Selling Price of good after 7 years (S.P) = $40,000

Average depreciation = (C.P - S.P)/ Number of years

= $(100,000 - 40,000) / 7

= $ 60,000 / 7

= $ 8,571.43

Assuming a simple depreciation model,

=> A = P(1+ rt)

=> 40,000 = 100,000( 1 + 7r)

=> 0.4 = (1 + 7r)

=> r = -0.0857 %

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