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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 3year 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 halfyear
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 712: 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 715: 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 72 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 72 on page 310, the GDS recovery period is seven years. GDS recovery rates (rk) can
be found on page 312. From table 73, 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 720: 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 722: A $125,000 tractortrailer is being depreciated by the SL method over five
years to a final BV of zero. Halfyear 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 UniversityWest Lafayette.
 Spring '08
 Vincent,G

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