Question

A chemical process is licensed to produce high-octane, low Sulphur blend-stocks domestically and internationally. Halliburton industries has newly licensed the process costing $1 million per system at its Moscow, Houston and Abu Dhabi refinery service operations. Russia requires a 10-year, straight line recovery with 10% salvage value. The United States allows a 7-year MACRS recovery with no salvage value considered. The UAE allows a 7-year recovery with switching from DDB to SL method and no salvage value considered. Which of the country’s methods has the largest PW of depreciation at an interest rate of 15% per year? Make sure to use Excel functions

Answer 1

	A	Initial Cost of process	$1,000,000
		RUSSIA -STRAIGHT LINE METHOD
	B=0.1*A	Salvage Value	$100,000	(0.1*1000000)
	C=(A-B)/10	Annual Straight line depreciation	$                 90,000
		Present Worth(PW) of depreciation	$451,689	(Using excel PV function with Rate=15%, Nper=10, Pmt=-90000)
		UNITED STATES-7 YEAR MACRS
		Present Worth (PW) of Cash flow=(Cash flow)/((1+i)^N)
		i=interest rate=15%=0.15
		N=Year of cash flow
		N	A	B=A*1000000	C=B/(1.15^N)
		Year	MACRS Recovery	Depreciation	PW of
			Rate	Amount	Depreciation
		1	0.1429	$            142,900	124260.8696
		2	0.2449	$            244,900	185179.5841
		3	0.1749	$            174,900	114999.5891
		4	0.1249	$            124,900	71411.98037
		5	0.0893	$               89,300	44397.88246
		6	0.0892	$               89,200	38563.62156
		7	0.0893	$               89,300	33571.17767
		8	0.0446	$               44,600	14579.81911
				SUM	626964.5239
		Present Worth (PW) of depreciation	$               626,965
		UAE-7 YEAR DDB RECOVERY FOLLOWED BY STRAIGHT LINE DEPRECIATION WITH NO SALVAGE VALUE
		7 Year Straight Line rate=1/7=	0.142857143
		DDB Recovery Rate=2*0.142857143=	0.285714286
		Annual depreciation after 7 years=	$31,622	(94864.51/3)
		N	A	B	C=A*B	D=A-C	E=C/(1.15^N)
		Year	Beginning book	Recovery Rate	Amount of	Ending	PW of
			Balance		Depreciation	Book Balance	Depreciation
		1	$1,000,000	0.285714286	$285,714.29	$714,285.71	248447.205
		2	$714,285.71	0.285714286	$204,081.63	$510,204.08	154315.034
		3	$510,204.08	0.285714286	$145,772.59	$364,431.49	95847.8473
		4	$364,431.49	0.285714286	$104,123.28	$260,308.20	59532.8244
		5	$260,308.20	0.285714286	$74,373.77	$185,934.43	36976.9095
		6	$185,934.43	0.285714286	$53,124.12	$132,810.31	22967.0246
		7	$132,810.31	0.285714286	$37,945.80	$94,864.51	14265.2326
		8			$31,622		10337.2879
		9			$31,622		8988.94599
		10			$31,622		7816.47478
						SUM	659494.787
		Present Worth (PW) of depreciation	$               659,495
		LARGEST PW OF DEPRECIATION	UAE