2. XYZ Machining Inc. is considering the purchase of a new milling machine at a

Question

2. XYZ Machining Inc. is considering the purchase of a new milling machine at a cost of $18,000. The machine is expected to have a service life of eight years and a salvage value of $2,500. Develop the complete depreciation schedule for the machine showing year-by-year depreciation charges and book values, and determine the present worth of all the depreciation charges assuming an interest rate of 10% per year, using:

(a) Straight line depreciation, (b) SOYD depreciation.

[Answers: (a) 10,336 (b) 11,475]

be sure to include complete depreciation schedules showing year-by-year depreciation amounts and book values.

Explanation / Answer

Answer 1 Depreciation under Straight line method = (Cost - salvage value ) / useful life Depreciation under Straight line method = (18000 - 2500 ) / 8 = $1937.50 per year Depreciation schedule Year Depreciation Book value of asset PV Factor at 10% rate Present value of depreciation A B C A * B 0                          18,000.00 1                                           1,937.50                          16,062.50 0.909090909                                               1,761.36 2                                           1,937.50                          14,125.00 0.826446281                                               1,601.24 3                                           1,937.50                          12,187.50 0.751314801                                               1,455.67 4                                           1,937.50                          10,250.00 0.683013455                                               1,323.34 5                                           1,937.50                             8,312.50 0.620921323                                               1,203.04 6                                           1,937.50                             6,375.00 0.56447393                                               1,093.67 7                                           1,937.50                             4,437.50 0.513158118                                                  994.24 8                                           1,937.50                             2,500.00 0.46650738                                                  903.86                                            10,336.42 Present value of depreciation = $10336 Answer 2 Sum of the years depreciation is as under Applicable % = Number of years of estimated life remaining at the beginning of the year / SYD SYD = n(n+1) / 2 n= estimated useful life = 8 SYD = 8(8+1) / 2 = 36 Depreciation schedule Year Remaining useful life Applicable % Annual Depreciation PV Factor at 10% rate Present value of depreciation at the beginning of the year A B = A/36 C =B * $15500 D C * D 1 8 22%                                3,444.44 0.909090909                                                3,131.31 2 7 19%                                3,013.89 0.826446281                                                2,490.82 3 6 17%                                2,583.33 0.751314801                                                1,940.90 4 5 14%                                2,152.78 0.683013455                                                1,470.38 5 4 11%                                1,722.22 0.620921323                                                1,069.36 6 3 8%                                1,291.67 0.56447393                                                    729.11 7 2 6%                                    861.11 0.513158118                                                    441.89 8 1 3%                                    430.56 0.46650738                                                    200.86 100%                              15,500.00                                              11,474.62 Present value of depreciation = $11475

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