The De La Salle Bus Company has decided to purchase a new bus for $85,000 with a

Question

The De La Salle Bus Company has decided to purchase a new bus for $85,000 with a trade-in of their old bus. The old bus has a book value of $10,000 at the time of the trade-in. The new bus will be kept nine years before being sold. Its estimated salvage value is expected to be $5,000. The cost basis for the bus will be equal to the original purchase price of the bus plus the book value of the old bus that was traded. Compute the depreciation write-offs and corresponding book values for the bus using the methods listed below. Assume a class life of nine years for the classical methods a. Straight Line Method b. Double Declining Balance Method C. Sum of Years Digits Methoo d. MACRS using a 5-year recovery period Provide a plot of Book Value vs. Time for all four methods on the same graph. Using a MARR of 10% per year, compute the present worth of the depreciation write-offs for each of the four methods

Explanation / Answer

Answer:

cost =Original value of the asset+ purchase value of the asset= $85000+$10000=$95000

N= 9 years

Salvage value =$10000

a) Straight line method of Depreciation: cost of aquisation- Salvage value/No of years

Depreciation =$95000-$10000/9=9444.44

b)Double declining balance method

First, calculate the depreciation rate=straight line dep. rate=1/=0.11.11=11%

Decling balance rate=2*11%=22%

Depreciation=22%*95000=20900

Ist year depreciation Balance in book

1 20900 95000-20900=74100

2 22%*74100 16302 74100-16302=57798

3.22%*57798 12716 57798-12716=45082

4.22%*45082 9918 45082-9918=35164

5.22%*35164 7736 35164-7736=27428

6.22*27248 6034 27248-6034=21393

7.22%*21393 4706 21393-4706= 16687

8.22%*16687 3671 16687-3671=13016

9.22%*13016 2863 13016-2863=10152

3. Sum of years digit method:(n-i+1)/n!-( Total Aquisation cost-salvage value)

n=9 i=1 n!=9+8+7+6+5+4+3+2+1=45

Depreciable value=95000-10000=85000

Year Depreciation Balance value

1 9/45*( 950000-10000) 17000 95000-17000=78000

2.8/45 * 850000 15111 78000-15111=62889

3.7/45*85000 13222 62889-13222=49667

4.6/45*85000 11333.33 49667-11333.33=38333

5.5/45*85000 9444 38333-9444=28889

6.4/45*85000 7555 28889-7555=21333

7.3/45*85000 5666 21333-5666=15667

8.2/45*85000 37777 15667-3777=11889

9.1/45*85000 1888 11889-1888=10000

4.Marcs using a % a 5 year method:

Depreciation in Ist year :cost*1/useful life*A*depreciation convention

A= Annua; usuage

Depreciation convention is 1 full year

Ist year = 95000*1/9*100%*1=10555.56

2nd yeat=(95000-10555)*2/9*100%*1=18765

3 rd year =(95000-10555-18765)*3/9*100*1=21892

4 th year =(95000-10555-18765-21892)*4/9*100*1=19460.41

5 th year= 95000-10555-18795-21892-19460*5/9*1=13514

(ends)

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