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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Machine A has been completely overhauled for $9000 and is expected to last another 12 years. The $9000 was treated as an expense for tax purposes last year. It can be sold now for $30,000 net after selling expenses, but will not have salvage value 12 years hence. It was bought new 9 years ago for $54,000 and has been depreciated since then by straight-line depreciation using a 12-year depreciable life. Because less output is now required, Machine A can now be replaced with a smaller Machine B. Machine B costs $42,000, has anticipated life of 12 years, and would reduce operating costs by $2500 per year. It would be depreciated by straight-line depreciation with a 12-year depreciable life and no salvage value.
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- The original equipment was purchased 3 years ago for $200,000 and was depreciating using the 5 Year MACRS depreciation schedule over 6 years. It has currently been depreciated 71% of the original cost. The equipment was planned to be sold at the end of it’s 5th year of use before it was fully depreciated for a salvage value in two years at an estimated $30,000. The old equipment has a current salvage value of $98,000.What's is the new NPV?The Giovanni Company purchased a tooling machine in 2007 for $120,000. The machine was being depreciated by the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2017, after 10 years of use, Giovanni paid $20,000 to overhaul the machine. Because of this improvement, the machine's estimated useful life would be extended an additional 5 years. What would be the depreciation expense recorded for the above machine in 2017? a.$7,333 b.$4,000 c.$6,000 d.$5,333The Dauten Toy Corporation uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $10,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would…
- The Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. The machine is being depreciated on a straight- line basis, and it has 6 years of remaining life. Its current book value is $2,400, and it can be sold for $2,600 at this time. Thus, the anual depreciation expense is $2,400/6= $400 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten offered a replacement machine which has a cost of $10,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would arise by $1,000 per year; even so, the new machine's much greater efficiency would cause operating expenses simultaneously increase by $500. Dauten's marginal federal-plus- state tax rate is 25%, and its WACC is 11% What is the NPV of the…The equipment has a delivered cost of $57,000. An additional $3,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS as per the Tax Reform Act of 1986 and a further modification in 2005. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of…The equipment has a delivered cost of $57,000. An additional $3,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS as per the Tax Reform Act of 1986 and a further modification in 2005. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of…
- The equipment has a delivered cost of $57,000. An additional $3,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS as per the Tax Reform Act of 1986 and a further modification in 2005. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of…The equipment has a delivered cost of $57,000. An additional $3,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS as per the Tax Reform Act of 1986 and a further modification in 2005. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of…The Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $9,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would…
- The equipment has a delivered cost of $57,000. An additional $3,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS as per the Tax Reform Act of 1986 and a further modification in 2005. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of…The Apex Company purchased a tooling machine for $30,000. The machine was being depreciated on the straight-line method over an estimated useful life of 20 years with no salvage value. When the machine had been in use for 10 years, the company paid $5,000 to overhaul the machine. As a result of this improvement , the company estimated that the useful life of the machine would be an additional five years. What should be the depreciation expense recorded for the above machine in the 11th year? a.$1,000 b.$1,333 c.$1,500 d.$1,833The Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,400, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,400/6 = $400 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $10,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would…