Tri-X industries want to expand its production facilities at a cost of $500,000.
ID: 2616534 • Letter: T
Question
Tri-X industries want to expand its production facilities at a cost of $500,000. The equipment is expected to have an economic life of 8 years, have a 7-year property class and have a resale value of $55,000 after eight years of use. The annual operating cost is expected to be $12,000 for the first year and to increase by $750 per year thereafter. If the equipment is purchased, Tri-X wants to compare the straight line depreciation method to the MACRS method. If the MARR is 9% for present worth approximations, should Tri-X use the straight line method or MACRS method? Create a depreciation schedule for both methods. Show all of your work.
Explanation / Answer
Depreciation schedule under MACRS method: Year Cost macrs dep rate Dep. 1 445000 14.29 63590.5 2 24.49 108980.5 3 17.49 77830.5 4 12.49 55580.5 5 8.93 39738.5 6 8.92 39694 7 8.934 39756.3 8 4.46 19830 Total 445000.8 Depreciation schedule under SL method: Year Cost macrs dep rate Dep. 1 445000 12.50 55625 2 12.50 55625 3 12.50 55625 4 12.50 55625 5 12.50 55625 6 12.50 55625 7 12.50 55625 8 12.50 55625 Total 445000 PV/WORTH OF ALL COSTS UNDER MACRS METHOD : Year Total operating costs Dep exp-macrs Total costs Discount factor 9% PV 1 12000 63590.5 75591.5 0.917 69317.41 2 12750 108980.5 121732.5 0.842 102498.8 3 13500 77830.5 91333.5 0.772 70509.46 4 14250 55580.5 69834.5 0.708 49442.83 5 15000 39738.5 54743.5 0.65 35583.28 6 15750 39694 55450 0.596 33048.2 7 16500 39756.3 56263.3 0.547 30776.03 8 17250 19830 37088 0.502 18618.18 Total 409794.1 PV/WORTH OF ALL COSTS UNDER STRAIGHT LINE METHOD : Year Total operating costs Dep exp-macrs Total costs Discount factor 9% PV 1 12000 55625 67626 0.917 62013.04 2 12750 55625 68377 0.842 57573.43 3 13500 55625 69128 0.772 53366.82 4 14250 55625 69879 0.708 49474.33 5 15000 55625 70630 0.65 45909.5 6 15750 55625 71381 0.596 42543.08 7 16500 55625 72132 0.547 39456.2 8 17250 55625 72883 0.502 36587.27 Total 386923.7 The Straight line method is sellected because of lower worth of all future costs.
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