In: Economics
Blackwater Spring and Metal utilizes the same computerized spring-forming machinery in its U.S. and Malaysian plants. The first cost was $750,000 with S = $150,000 after n = 10 years. MACRS (Modified Accelerated Cost Recovery System) depreciation with n = 5 years is applied in the United States, and standard SL depreciation with n = 10 years is used by the Malaysian facility. If the equipment is sold after 6 years for $100,000, calculate the over-and underdepreciation amounts for each method.
Answer:-
To calculate the depreciations values we use two Methods MARC & SL Method
1. MACRS: Here the depreciation is calculated based on the table for n=5
The value after depreciation is given by subtracting the depreciation amount for each year from the initial value. The Depreciations rate taken from the MARCS table for n=5
Thus at the end of 6 years values as per MACRS is 0
Overdepreciations = Selling Price - Value based on MACRS = $ 100,000
2. SL Method Computation
First we calculate the rate of depreciation / annum
Cost value = 750,000
Residual Value after 10 years = 150,000
Depreciation Expense / Annum = (Cost - Residual)/Years of Useful Life
= (750,000-150,000) / 10
= $ 60,000/ Annum
Depreciations in 6 years = 60,000* 6 = $ 360,000
Values after 6 years = 750,000-360,000
= $ 390,000
Underdepreciation = Selling Price - Value based on SL method after 6 years
=100,000- 390,000
= - $ 290,000