Question

Clearly present the cash flow diagram(s), equivalency model(s),
assumptions made and detailed calculations( please dont post exel tables(
..
If you were to use Double Declining Balance depreciation for an asset which costs $100,000 and had an estimated salvage value of $5,000 and an 8-year useful life, in which year would you switch to straight line depreciation?

Answer 1

Depreciation p.a under Straight line method = Original Cost- Salvage Value/ life of asset

                                                                                      =$100,000-$5,000/8

                                                                                     =$95,000/8

                                                                                     =$11,875

Depreciation under Straight line is uniform

Depreciation under Double Declining Balance depreciation =1/ life of asset x 2

                                                                                      =(1/8) x 2

                                                                                        =12.5% x 2

                                                                                         =25%

Double Decline Method
Year	Beginning Value of Asset	Dep %	Depreciation	Accumulated Depreciation	Ending Balance of Asset
1	$                                1,00,000	25%	$          25,000	$                                       25,000	$                                 75,000
2	$                                   75,000	25%	$          18,750	$                                       43,750	$                                 56,250
3	$                                   56,250	25%	$          14,063	$                                       57,813	$                                 42,188
4	$                                   42,188	25%	$          10,547	$                                       68,359	$                                 31,641
5	$                                   31,641	25%	$            7,910	$                                       76,270	$                                 23,730
6	$                                   23,730	25%	$            5,933	$                                       82,202	$                                 17,798
7	$                                   17,798	25%	$            4,449	$                                       86,652	$                                 13,348
8	$                                   13,348	25%	$            8,348	$                                       95,000	$                                   5,000

In year 4 we will switch to straight line method as depreciation in Straight line ($11,875 ) is higher than depreciation under double decline method ($10,547)

Which gives higher tax advantage because reduction net income