Question

An array of solar panels was purchased and placed in service by a energy company. Its cost basis is $60,000, and it has an estimated MV of $1,000 at the end of an estimated useful life of 10 years. Compute the book value (BV) at the end of the array's eighth year of life when using the DB method with switchover to SL and a DB ratio of 200%. Express your answer in terms of dollars and cents, rounded to the nearest cent (e.g., 1234.56).

Answer 1

Switching to Straight line method (SLM) is done in the year when DB Annual depreciation is less than SLM Annual depreciation.

SLM annual depreciation ($) = (Cost - Salvage value) / Useful life = (60,000 - 1,000) / 10 = 59,000 / 10 = 5,900

SLM depreciation rate = 1 / Useful life = 1 / 10 = 0.1

DB Depreciation rate = 2 x SL rate = 2 x 0.1 = 0.2

(Values in $)
YEAR	Beginning Book Value	DB Depreciation	SL Depreciation	Switch?	Annual Depreciation (Dt)	Ending Book Value (Bt)
1	60,000	12,000	5,900	NO	12,000	48,000.00
2	48,000	9,600	5,900	NO	9,600	38,400.00
3	38,400	7,680	5,900	NO	7,680	30,720.00
4	30,720	6,144	5,900	NO	6,144	24,576.00
5	24,576	4,915	5,900	YES	5,900	18,676.00
6	18,676		5,900	YES	5,900	12,776.00
7	12,776		5,900	YES	5,900	6,876.00
8	6,876		5,900	YES	5,900	976.00

Optimal time to switch = Year 5.

Book value at end of year 8 = $976.00