Question

In: Economics

Blackwater Spring and Metal utilizes the same computerized spring-forming machinery in its U.S. and Malaysian plants....

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.

Solutions

Expert Solution

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


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