Tinney & Smyth Inc. is considering the purchase of a new batch polymer-bonding m

Question

Tinney & Smyth Inc. is considering the purchase of a new batch polymer-bonding machine for producing Crazy Rubber, a children's toy that is soft, pliable but also bouncy. The machine will increase EBITDA by $ 255,000 per year for the next two years. Assume that operating cash flows occur at the end of each year. The machine's purchase price is $ 350,000and the salvage value at the end of two years is $ 59,500. The machine is classified as 3-year property. To run the Crazy Rubber production line the company will need to purchase an inventory of polydimethylsiloxane and boric acid for a total cost of $ 24,000. The MACRS depreciation rates for the first two years are 33.33 %and 44.45 %. What is the depreciation expense in the second year of operations?

The depreciation expense for the second year will be? (Round to the nearest dollar.)

Explanation / Answer

The cost of the machine is $350,000 and the salvage value at the end if 2 years if $59,500. The machine is classified as a 3 year property with depreciation rate of 33.33% on year 1 and 44.45% on year 2 Therefore, the depreciation expense for the 2nd year of operation would be:

Depreciation expense , year 2 = $350,000 * 44.45/100 = $155,575

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