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Unformatted text preview: ISyE 3025 Engineering Economy Spring 2011 Professor Nagi Gebraeel Solution to Exam III B 1.  The depreciation deduction for year 11 of an asset with a 20 year useful life is $4 , 000. If the assets salvage value was estimated to be zero and straight-line depreciation was used to calculate the depreciation deduction for year 11, what was the assets initial value? (a) $72 , 682 (b) $80 , 000 X (c) $42 , 105 (d) $67 , 682 Solution: Under the straight-line method we depreciate the same amount every year of the useful life. With a 20 year life and an annual depreciation of $4 , 000 (and salvage value of $0), the initial value of the asset is 20 4 , 000 = $80 , 000. 2.  When a business calculates taxable income from gross income, which of the following is true? (a) Depreciation is subtracted; interest and principal are not. (b) Interest and principal are subtracted; depreciation is not. (c) Depreciation, interest, and principal are all subtracted. (d) Depreciation and interest are subtracted; principal is not. X 3.  A lumber company purchases and installs a wood chipper for $200 , 000. The chipper is classified as a MACRS 7-year property. Its useful life is 10 years. The estimated salvage value at the end of 10 years is $25 , 000. Using MACRS depreciation, compute the first year depreciation. (a) $17 , 500 (b) $25 , 000 (c) $28 , 571 . 43 X (d) $20 , 000 Solution: The first-year depreciation percentage for an asset in the 7-year property class is 14 . 29%. We obtain the correct answer by multiplying this percentage by the initial value of $200 , 000. 4.  An X-ray machine is classified as a MACRS 5-year property. It costs $6 , 000 and has an expected useful life of 8 years. The salvage value at the end of 8 years is expected to be $500. Assuming auseful life of 8 years....
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