Suppose BearKat Enterprises is considering a project where they will make Espres

Question

Suppose BearKat Enterprises is considering a project where they will make Espresso coffee makers. They can buy the equipment they need to make the coffee makers for $500,000 plus another $40,000 for training and installation. They will have to increase inventory by $50,000 however, accounts payable will increase $20,000. They think they can sell 7,000 coffee makers a year at a price of $65 each. The estimate variable costs at 40% of revenue. They follow a four yeas MACRS schedule for depreciation with the following depreciation rates: Year 1: 33% Year 2: 45% Year 3: 15% Year 4: 7% They believe the equipment has a salvage value of $10,000. BearKat Enterprises has a tax rate of 34%. What are the depreciation expenses in year 2?

Explanation / Answer

Cost of Equipment = $500,000
Training and Installation = $40,000

Total Cost of Equipment = Cost of Equipment + Training and Installation
Total Cost of Equipment = $500,000 + $40,000
Total Cost of Equipment = $540,000

Depreciation Rate in Year 2 = 45%

Depreciation Expense in Year 2 = 45% * $540,000
Depreciation Expense in Year 2 = $243,000

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