Engineering Economic Analysis

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Problems 367

there will be no salvage value to TELCO. The ware-

house is to be depreciated either by MACRS or SOYD

depreciation. If 10% interest is appropriate, which

depreciation method should be selected?

11-16 A profitable company making earthmoving equip-

ment is considering an investment of $100,000 on

equipment that will have 5-year useful life and a

$20,000 salvage value. If money is worth 10%, which

one of the following three methods of depreciation

would be preferable?

(a) Straight-line method.

(b) Double declining balance method.

(c) MACRS method.

11-17 The White Swan Talc Company purchased $120,000

of mining equipment for a small talc mine. The mining

engineer's report indicates the mine contains 40,000

cubic meters of commercial quality talc. The com-

pany plans to mine all the talc in the next 5 years as

follows:

Year

1

2

3

4

5

Talc

Production (m3)

15,000

11,000

4,000

6,000

4,000

At the end of 5 years, the mine will be exhausted and

the mining equipment will be worthless. The com-

pany accountant must now decide whether to use sum-

of-years' -digits depreciation or unit-of-production

depreciation. The company considers 8% to be an

appropriate time value of money. Compute the de-

preciation schedule for each of the two methods.

Which method would you reco~end that the com-

pany adopt? Show the computations to justify your

decision.

11-18 For its fabricated metal products, the Able Corp. is
buying $10,000 of special tools that have a 4-year
useful life and no salvage value. Compute the de-
preciation charge for thesecondyear by each of the
following methods:
(a)DDB.
(b) Sum-of -years' -digits.
(c) Modified accelerated cost recovery system.

11-19 The MACRS depreciation percentages for 7-year
personal property are given in Table 11-3. Make the
necessary computations to determine if the percent-
ages shown are correct.

11-20 The MACRS depreciation percentages for lO-year

personal property are given in Table 11-3. Make the

necessary computations to determine if the percent-

ages shown are correct.

11-21 Use MACRS GDS depreciation for each of the assets,

1-3, to calculate the following items,(a)-(c).

1. A light general-purpose truck used by a delivery
   business, cost=$17,000.


2. Production equipment used by a Detroit auto-
   maker to produce vehicles, cost = $30,000.


3. Cement production facilities used by a construc-
   tion firm, cost $130,000.
   (a) The MACRS GDS property class.
   (b) The depreciation deduction for Year 3.
   (c) The book value of the asset after 6 years.
   11-22 On July 1,Nancy Regan paid $600,000 foracommer-
   cial building and an additional $150,000 for the land
   on which it stands. Four years later, also on July 1, sbe
   sold the property for $850,000. Compute the modi-
   fied accelerated cost recovery system depreciation for
   each of thefivecalendar years during which she had
   the property.
   11-23 A group of investors has formed Trump Corpora-
   tion to purchase a small hotel. The asking price is
   $150,000 for the land and $850,000 for the hotel
   building. If the purchase takes place in June, compute
   the MACRS depreciation for the first three calendar
   years. Then assume the hotel is sold in June of the
   fourth year, and compute the MACRS depreciation
   in that year also.
   11-24 Mr. Donald Spade purchased a computer in January
   to keep records on all the property he owns. The
   computer cost $70,000 and is to be depreciated using
   MACRS. Donald's accountant pointed out that un-
   der a special tax rule (the rule applies when the value
   of property placed in service in the last 3 months of
   the tax year exceeds 40% of all the property placed
   in service during the tax year), the computer and all
   property that year would be subject to the midquar-
   ter convention. The midquarter convention assumes
   that all property placed in service in any quarter-year
   is placed in service at the midpoint of the quarter.
   Use the mid-quarter convention to compute Donald's
   MACRS depreciation for the first year.
   11-25 A company is considering buying a new piece of
   machinery. A 10% interest rate will be used in
   the computations. Two models of the machine are
   available.