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# newnansm11 - Chapter 11 Income Depreciation and Cash Flow...

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Unformatted text preview: Chapter 11: Income, Depreciation, and Cash Flow 11-1 Year SOYD DDB 1 \$2,400 \$3,333 2 \$2,000 \$2,222 3 \$1,600 \$1,482 4 \$1,200 \$988 5 \$800 \$375* 6 \$400 \$0 Sum \$8,400 \$8,400 *Computed \$658 must be reduced to \$375 to avoid depreciating the asset below its salvage value. 11-2 DDB Schedule is: Year n d(n)=(2/n)[P – sum d(n)] DDB Depreciation 1 (2/6) (\$1,000,000 - \$0) = \$333,333 2 (2/6) (\$1,000,000 - \$333,333) = \$222,222 3 (2/6) (\$1,000,000 - \$555,555) = \$148,148 4 (2/6) (\$1,000,000 - \$703,703) = \$98,766 5 (2/6) (\$1,000,000 - \$802,469) = \$65,844 6 See below = \$56,687 If switch DDB to SL for year 5: SL = (\$1,000,000 - \$802,469 - \$75,000)/2 = \$61,266 Do not switch. If switch DDB to SL for year 6: SL = (\$1,000,000 - \$868,313 - \$75,000)/1 = \$56,687 Do switch. Sum-of-Years Digits Schedule is: SOYD in N = [(Remain. useful life at begin. of yr.)/[(N/2)(N+1)]] (P – S) 1 st Year: SOYD = (6/21) (\$1 mil - \$75,000) = \$264,286 2 nd Year: = (5/21) (\$1 mil - \$75,000) = \$220,238 3 rd Year: = (4/21) (\$1 mil - \$75,000) = \$176,190 4 th Year: = (3/21) (\$1 mil - \$75,000) = \$132,143 5 rd Year: = (2/21) (\$1 mil - \$75,000) = \$ 88,095 6 th Year: = (1/21) (\$1 mil - \$75,000) = \$ 44,048 Question: Which method is preferred? Answer: It depends, on the MARR%, i% used by the firm (individual) As an example: If i% is= PW of DDB is= PW of SOYD is= Preferred is 0% \$925,000 \$925,000 Equal, same 2% \$881,211 \$877,801 DDB 10% \$738,331 \$724,468 DDB 25% \$561,631 \$537,130 DDB Thus, if MARR% is > 0%, DDB is best. One can also see this by inspection of the depreciation schedules above. 11-3 DDB Depreciation Year DDB Depreciation 1 (2/5) (\$16,000 - \$0) = \$6,400 2 (2/5) (\$16,000 - \$6,400) = \$3,840 3 (2/5) (\$16,000 - \$10,240) = \$2,304 4 (2/5) (\$16,000 - \$13,926) = \$830 Sum \$14,756 Converting to Straight Line Depreciation If Switch for Year Beginning of Yr Book Value Remaining Life SL = (Book – Salvage)/ Remaining Life Decision 2 \$9,600 4 yrs \$2,400 Do not switch 3 \$5,760 3 yrs \$1,920 Do not switch 4 \$3,456 2 yrs \$1,728 Switch to SL 5 \$2,074 1 yr \$2,074 Resulting Depreciation Schedule: Year DDB with Conversion to Straight Line 1 \$6,400 2 \$3,840 3 \$2,304 4 \$1,728 5 \$1,728 Sum \$16,000 11-4 P=\$12,000 S=\$3,500 N=4 (a) Straight Line Depreciation SL = -(P-S) / N =(\$12,000-\$3,500) / 4 \$2,125 (b) Sum-of-Years Digits Depreciation SOYD in yr. N = [(Remain. useful life at begin. of yr.)/[(N/2)(N+1)]] (P – S) 1 st Year: SOYD = (4/10) (\$12,000 - \$3,500)= \$3,400 2 nd Year: = (3/10) (\$12,000 - \$3,500)= \$2,550 3 rd Year: = (2/10) (\$12,000 - \$3,500)= \$1,700 4 th Year: = (1/10) (\$12,000 - \$3,500)= \$850 (c) Double Declining Balance Depreciation DDB in any year = 2/N(BookValue) DDB in any year = 2/N (Book Value) Year: DDB = (2/4) (\$12,000 - \$0) = \$6,000 2 nd Year: = (2/4) (\$12,000 - \$6,000) = \$3,000 3 rd Year: = (2/4) (\$12,000 - \$9,000) = \$1,500 4 th Year: = (2/4) (\$12,000 - \$10,500) = \$750 (d) CCA Special handling equipment classifies as a Class 43 asset with a CCA rate of 30% Year UCC at Start of Year CCA Rate...
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newnansm11 - Chapter 11 Income Depreciation and Cash Flow...

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