IE343_HW9_Solutions - Homework # 9 Solutions PURDUE...

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Unformatted text preview: Homework # 9 Solutions PURDUE UNIVERSITY IE 343: Engineering Economics Fall 2010 Instructor: A. Capponi Homework Assignment #9 Assigned: 05 Nov 2010 Due: 12 Nov 2010 Missing name on the top of each page submitted – 2 Not stapled together – 2 Not completed on the correct template – 10 Problem 1 (10 points) Consider a 3-year MACRS property asset with an installed cost basis of $100. Develop the MACRS percentage rates, rk, for the asset based on the underlying depreciation methods. (Hint: you may want to follow the example shown in class and use Table 7.3 to confirm your answer.) Since it is a 3 year property, then we use the 200% DB method with switch to SL at the optimal point. Salvage value is zero, thus the entire cost basis of $100 is depreciated. R = 2/3 Yr DDB SL () 1 ( ) MACRS rt (% ) Cum Depreciation(%) 33.33 (DDB) 33.33 2 ( )( ) 44.44 (DDB) 77.78 3 ( )( ) 14.81 (either) 92.59 7.4074 (SL) 100 4 ( ) Homework # 9 Solutions Problem 2 (10 points) Hoppy Hops, Inc. purchased hop harvesting machinery for $150,000 four years ago. Due to a change in the method of harvesting, the machine was recently sold for $37,500. Assume a 5 year property class. (a) Determine the MACRS depreciation schedule for the machinery for the four years of ownership. Basis Cost = $150,000. Using depreciation rates in Table 7.3, we have Year rt(%) dt=Basis Cost*rt Cumulative dt BVt 0 $150,000 1 0.2 $30,000 $120,000 $30,000 2 0.32 $78,000 $72,000 $48,000 3 0.192 $106,800 $43,200 $28,800 4 0.1152*0.5 = 0.0576 $115,440 $34,560 $8,640 Since the machinery is sold in year 4 (before the full recovery period), then we apply the half-year convention in year 4. (b) What the gain or loss on the sale of the machinery? $37,500 - $34,560 = $2,940 You gain $2,940 on this sale. Problem 3 (10 points) Textbook problem 7-12: A construction company is considering changing its depreciation from the MACRS method to the historical SL method for a general purpose hauling truck. The cost basis of the truck is $100,000, and the expected salvage value for depreciation purposes is $8,000. The company will use the truck for eight years and will depreciate it over this period of time with the SL method. What is the difference in the amount of depreciation that would be claimed in year five (i.e., MACRS versus SL)? Using depreciation rates in Table 7.3, we know when recovery period is 5 year. So if using MACRS, the depreciation in year 5 is If using SL method, the depreciation in year 5 is ( The difference in the amount of depreciation in year 5 is ) Homework # 9 Solutions Problem 4 (10 points) Textbook problem 7-15: A manufacturer of aerospace products purchased three flexible assembly cells for $500,000 each. Delivery and insurance charges were $35,000, and installation of the cells cost another $50,000. a. Determine the cost basis of the three cells. Three flexible assembly cells = 3($500,000) = $1,500,000 Delivery and insurance charges = $35,000 Installation of the cells = $50,000 b. What is the class life of the cells? From table 7-2 on page 310, you can find that the class life for Manufacture of aerospace products (asset class = 37.2) is 10 years. c. What is the MACRS depreciation in year five? From table 7-2 on page 310, the GDS recovery period is seven years. GDS recovery rates (rk) can be found on page 312. From table 7-3, GDS recover rates, 0.0893, can be obtained. d. If the cells are sold to another company for $120,000 each at the end of year six, how much is the recaptured depreciation? ( ( The depreciation recaptured is )( ) )( ) – Problem 5 (15 points) Textbook problem 7-20: If the incremental federal income tax rate is 34% and the incremental state income tax rate is 6%, what is the effective combined income tax rate (t)? If state income taxes are 12% of taxable income, what now is the value of t? t = 0.06 + 0.34(1 − 0.06) = 0.3796, or 37.96% t = 0.12 + 0.34(1 − 0.12) = 0.4192, or 41.92% Homework # 9 Solutions Problem 6 (10 points) Textbook problem 7-22: A $125,000 tractor-trailer is being depreciated by the SL method over five years to a final BV of zero. Half-year convention does not apply to this asset. After three years, the rig is sold for (a) $70,000 or (b) $20,000. If the effective income tax rate is 40%, what is the net cash inflow from the sale for situation (a) and situation (b)? Year 0 1 2 3 4 5 SL Depreciation Book Value $125,000 $25,000 $100,000 $25,000 $75,000 $25,000 $50,000 $25,000 $25,000 $25,000 $0 ( (a) ) ( (b) ( (tax of $8,000 owed on this gain) ) ) (tax credit of $12,000 on this loss) ...
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This note was uploaded on 09/19/2011 for the course IE 343 taught by Professor Vincent,g during the Spring '08 term at Purdue University-West Lafayette.

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