Engineering Economic Analysis

368 DEPRECIATION

lI

Initial cost

End-of-useful-life

salvage value, S

Annual operating

cost

U sefullife, in years

MachineI Machinen

$80,000 $100,000

20,000 25,000

18,000 15,000 first 10 years

20,000 thereafter

20 25

(a) Determine which machine should be purchased,

based on equivalent uniform annual cost.

(b) What is the capitalized cost of Machine I?

(c)Machine I is purchased and a fund is set up to

replace Machine I at the end of 20 years. Compute

the required uniform annual deposit.

(d) Machine I will produce an annual saving of

material of $28,000. What is the rate of return if

Machine I is installed?

(e) What will be the book value of Machine I after 2

years, based on sum-of- years' -digits depreciation?

if) What will be the book value of Machine n

after 3 years, based on double declining balance

depreciation?

(g)Assuming that Machine n is in the 7-year property

class, what would be the MACRS depreciation in

the third year?

11-26 Equipment costing $20,000 that is a MACRS 3-year
property is disposed of during the second year for
$14,000. Calculate any depreciation recapture, ordi-
nary losses, or capital gains associated with disposal
of the equipment.

11-27 An asset with a 8-year ADR class life costs $50,000
and was purchased on January I, 2001. Calcu-
late any depreciation recapture, ordinary losses, or
capital gains associated with selling the equipment
on December 31, 2003, for $15,000, $25,000, and
$60,000. Consider two cases of depreciation for the
problem: if MACRS GDS is used, and if straight-line
depreciation over the ADR class life is used with a
$10,000 salvage value.

11-28 When a major highway was to be constructed nearby,
a farmer realized that a dry streambed running through
his property might a valuable source of sand and
gravel. He shipped samples to a testing labora-
tory and learned that the material met the require-
ments for certain low-grade fill material. The farmer
contacted the highway construction contractor, who
offered 65/ c per cubic meter for 45,000 cubic
meters of sand and gravel. The contractor would
build a haul road and would use his own equip-

ment. All activity would take place during a single

summer.

The farmer hired an engineering student for

$2500 to count the truckloads of material hauled

away. The farmer estimated that 2 acres of streambed

had been stripped of the sand and gravel. The 640-acre

farm had cost him $300 per acre, and the farmer felt

the property had not changed in value. He knew that

there had been no use for the sand and gravel prior to

the construction of the highway, and he could foresee

no future use for any of the remaining .50,000 cubic

meters of sand and gravel. Determine the fanner's

depletion allowance. (Answer: $1462.50)

11-29 Mr. H. Salt purchased a ys interest in a producing

oil well for $45,000. Recoverable oil reserves for the

well were estimated at that time at 15,000 barrels

ys of which represented Mr. Salt's share of the re~

serves. During the subsequent year, Mr. Smt received

$12,000 as hisysshare of the gross income from the

sale of 1000 barrels of oil. From this amount, he had

to pay $3000 as his share of the expense of producing

the oil. Compute Mr. Salt's depletion allowance for

the year. (Answer: $3000)

11-30 A heavy construction firm has been awarded a con-

tract to build a large concrete dam. It is expected that

a total of 8 years will be required to complete the

work. The firm will buy $600,000 worth of special

equipment for the job. During the preparation of the

job cost estimate, the following utilization schedule

was computed for the special equipment:

At the end of the job, it is estimated that the equipment

. can be sold at auction for $60,000.
(a) Compute the sum-of-years-digits' depreciation
schedule.
(b) Compute the unit-of-prQduction depreciation
schedule.
11-31 Some equipment costs $1000, has a 5-year deprecia-
.II. ble life, and an estimated $50 salvage value at the endof that time. You have been assigned the problem to
determine whether to use straight-line or SOYD de-
preciation. If a 10% interest rate is appropriate, which
is the preferred depreciation method for this profit.!"""

Utilization Utilization

Year (hr/yr) Year (hr/yr)

1 6000 5 800

(^240006800)
3 4000 7 2200
4 1600 8 2200