A testing lab owns a hydraulic load frame which was purchased for S35,000 early

Question

A testing lab owns a hydraulic load frame which was purchased for S35,000 early in the lab's fiscal year 4 years ago. The internal bookkeeper uses a sum of the year's digits depreciation method assuming a life of 12 years and zero salvage value. For tax purposes, it is being depreciated with a 25% Capital Cost Allowance. The lab's MARR is 10%. The fiscal year is the same as the calendar year. The existing frame has no value on the second hand market. The operating and maintenance costs for this frame have remained constant, and will main constant, at $6500.00 per year There is a new load frame on the market which sells for $40,000.00 and its operating and maintenance costs are estimated to be $3,000 in the first year, increasing by 15% per year. This new frame does have a second hand value estimated to decline 50% from the original purchase price in the first year, a further decline by 10% per year after. a) What was the internal depreciation charge that was made last year? b) What will the Undepreciated Capital Cost of the load frame be at the end of this fiscal year? c) If the frame is in fact sold for $5,000 this year what final entry must be made on this year's tax filing? d) What is the economic life of the new machine? Show all calculations and include a copy of your excel spreadsheet. e Should the existing frame be replaced with the new model (now)? Justify your answer.

Explanation / Answer

(a) Last Year depreciation i.e. Depreciation for 4th Year Sum of years = 1 + 2+3+4+5+6+7+8+9+10+11+12 = 78 Depreciation for 4th Year = Cost x (useful life - years for which depreciation already charged)/Sum of years digit =35000 x (12-3)/78 $      4,038.46 (b) UCC = Cost - Accumulated depreciation Accumulated depreciation - Year Beginning balance Depreciation UCC= Beginning - depreciation 1 Rs. 35,000.00 Rs. 8,750.00 Rs. 26,250.00 2 Rs. 26,250.00 Rs. 6,562.50 Rs. 19,687.50 3 Rs. 19,687.50 Rs. 4,921.88 Rs. 14,765.63 4 Rs. 14,765.63 Rs. 3,691.41 Rs. 11,074.22 5 Rs. 11,074.22 Rs. 2,768.55 Rs. 8,305.66 Or u can simply do this - Cost x (1- Rate)^Year 35000 x (0.75)^5 8305.66406 (c ) If frame is sold for 5000 Loss on sale for tax purposes = 8305.66 - 5000 =      =3305.66 (d) New machine - Since Tax rate is not provided in the question we are ignoring Depreciation tax savings Year cash flow salvage Value PV Factors Pv of Cash flows Cost of machine Cumulative cashflows Net cumulative cash flows Cumulative factors ACC a b c d e f g h i 1 3000 200000 0.909090909 -179091 400000 -179091 220909.0909 0.909090909 243000 2 3450 180000 0.826446281 -145909 400000 -325000 75000 1.73553719 43214.29 3 3967.5 162000 0.751314801 -118732 400000 -443732 -43732.1563 2.486851991 -17585.3 4 4562.625 145800 0.683013455 -96467 400000 -540199 -140199.184 3.169865446 -44228.7 5 5247.01875 131220 0.620921323 -78219.3 400000 -618418 -218418.494 3.790786769 -57618.2 6 6034.071563 118098 0.56447393 -63257.2 400000 -681676 -281675.66 4.355260699 -64674.8 7 6939.182297 106288.2 0.513158118 -50981.8 400000 -732657 -332657.415 4.868418818 -68329.7 8 7980.059641 95659.38 0.46650738 -40903.1 400000 -773560 -373560.465 5.334926198 -70021.7 9 9177.068588 86093.442 0.424097618 -32620.1 400000 -806181 -406180.516 5.759023816 -70529.4 10 10553.62888 77484.0978 0.385543289 -25804.6 400000 -831985 -431985.109 6.144567106 -70303.6 11 12136.67321 69735.68802 0.350493899 -20188.1 400000 -852173 -452173.212 6.495061005 -69618 12 13957.17419 62762.11922 0.318630818 -15550.8 400000 -867724 -467723.972 6.813691823 -68644.7 -70529.4 After year 9 Acc starts increasing therefore year 9 is economic life of plant (e) Equilent ACC of old machine = 6500 Which is less then the year one acc of new machine therefore old machine should be continued and not to be replaced untill year 3 where ACC is less for new machine Please provide feedback.. Thanks in advance.. :-)

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