Ms Smith starts business to supply finished forged crankshafts. She buys a lathe
ID: 2553925 • Letter: M
Question
Ms Smith starts business to supply finished forged crankshafts. She buys a lathe, a milling machine and a grinder for a total of $210,000 and metrology equipment and hand tools costing a total of $120,000. The machine tools have a recovery period of 7 year and the other equipment 3 years.
1. Plot a graph showing the book value of her equipment over a 10 year period using both straight line and modified ACRS depreciation(ie 2 lines on one graph)
HINT: The IRS get upset if you are not exact in calculations of taxable income (which
depreciation affects). Engineering Economic Analyses are primarily used to make business
decisions. You can easily show that some factor or another has no significant impact on the result – and choose not include it. REMEMBER, show all work. State any assumptions
The first 3 months of operations are spent on training in the use of the new equipment, marketing, and making 10 prototypes per month which cannot be sold. Fixed costs are $1000 per month and brought in rough forgings cost $20 each. A new turning tool ($20 ea) is required after each 30 parts made. Milling tools last longer – 120 parts – but are more expensive ($30) and finish grinding wheels last for 240 parts and cost $75 ea. Ms Smith pays her one machinist $4000/month and herself $5000/month. (not sure if this info is relevant to the answer)
Explanation / Answer
Step 1.
Calculation of capitalized cost of initial 3 months
30 parts
Forging cost = 30*20=600
Turning tool = 20
Milling tool = 30*30/120 = 7.5
Finish grinding wheels = 75*30/240 = 9.37
Salary and fixed cost will not be allocated into machines.
We assume all these costs to be allocated to the lathe, milling machine and grinder.
1. Sraight line method
a) Lathe, milling machine & grinder
Purchase cost = 210000
Allocated costs = 636.87
Total cost =210636.87
Straight line depreciation = 210636.87/7 = 30090. 91
Book value at the year end for next 7 years =
210636.87, 180545.96, 150455.05, 120364.14, 90273.23, 60182.32, 30090.91, 0
b) Metrology equipment and hand tools
Straight line depreciation = 120000/3 = 40000
Book value at the year end for next 3 years=
120000, 80000, 40000, 0
2. MARC
a) Lathe, milling machine and grinder =
Rates as per IRS tables (200% declining) = 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93
Book value at the year end for next seven years=
Book value at the beginning of year * (1-rate)
210636.87, 180536.86, 136323.38, 112480.42, 99556.41, 90675.98, 83494.44, 76881.68
b) Metrology equipment and hand tools
Rates as per IRS tables (200% declining) = 33.33, 44.45, 14.81
Book value at the end of 3 years =
120000, 80004, 44442, 37860
Final tables
Straight line book values at the year end (total of all machines and equipments)
330636.87, 260545.96, 190455.05, 120364.14, 90273.23, 60182.32, 30090.91, 0
MARC book values at the year end (Total of all machines and equipments)
330636.87, 260540, 180765.38, 150340.42, 99556.41, 90675.98, 83494.44, 76881.68
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