Question

Tri-X industries want to expand its production facilities at a cost of $500,000. The equipment is expected to have an economic life of 8 years, have a 7-year property class and have a resale value of $55,000 after eight years of use. The annual operating cost is expected to be $12,000 for the first year and to increase by $750 per year thereafter. If the equipment is purchased, Tri-X wants to compare the straight line depreciation method to the MACRS method. If the MARR is 9% for present worth approximations, should Tri-X use the straight line method or MACRS method? Create a depreciation schedule for both methods. Show all of your work.

Answer 1

Depreciation schedule under MACRS method:
Year	Cost	macrs dep rate	Dep.
1	445000	14.29	63590.5
2		24.49	108980.5
3		17.49	77830.5
4		12.49	55580.5
5		8.93	39738.5
6		8.92	39694
7		8.934	39756.3
8		4.46	19830
Total			445000.8
Depreciation schedule under SL method:
Year	Cost	macrs dep rate	Dep.
1	445000	12.50	55625
2		12.50	55625
3		12.50	55625
4		12.50	55625
5		12.50	55625
6		12.50	55625
7		12.50	55625
8		12.50	55625
Total			445000
PV/WORTH OF ALL COSTS UNDER MACRS METHOD :
Year	Total operating costs	Dep exp-macrs	Total costs	Discount factor 9%	PV
1	12000	63590.5	75591.5	0.917	69317.41
2	12750	108980.5	121732.5	0.842	102498.8
3	13500	77830.5	91333.5	0.772	70509.46
4	14250	55580.5	69834.5	0.708	49442.83
5	15000	39738.5	54743.5	0.65	35583.28
6	15750	39694	55450	0.596	33048.2
7	16500	39756.3	56263.3	0.547	30776.03
8	17250	19830	37088	0.502	18618.18
Total					409794.1
PV/WORTH OF ALL COSTS UNDER STRAIGHT LINE METHOD :
Year	Total operating costs	Dep exp-macrs	Total costs	Discount factor 9%	PV
1	12000	55625	67626	0.917	62013.04
2	12750	55625	68377	0.842	57573.43
3	13500	55625	69128	0.772	53366.82
4	14250	55625	69879	0.708	49474.33
5	15000	55625	70630	0.65	45909.5
6	15750	55625	71381	0.596	42543.08
7	16500	55625	72132	0.547	39456.2
8	17250	55625	72883	0.502	36587.27
Total					386923.7
The Straight line method is sellected because of lower worth of all future costs.