Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $776,600. The equipment was expected to have a useful life of three years, or 7,500 operating hours, and a residual value of $64,100. The equipment was used for 3,000 hours during Year 1, 2,325 hours in Year 2, and 2,175 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method.

Note: For all methods, round the answer for each year to the nearest whole dollar.

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

Answer the following short questions. Show all your calculations and explain every step. There are several ways of solving the questions. I expect each of you to solve them in your own way.

1. What is the length of time required for an amount of money to quadruple in value at an interest rate of 8% per year?
2. What is the equal annual amount deposit needed in years 1 through 5 (i.e., in years 1, 2, 3, 4, and 5) to provide for a withdrawal of 1100 TL in year 6 and subsequent withdrawals that increase in 400 TL per year from year 7 to year 35 at an interest rate of 8% per year?
3. The maintenance cost for a certain machine is 1500 TL per year for the first 5 years (from n=1 to n=5), 2200 TL in year 6, and from year 7 until year 35 the maintenance cost per year increases 6% with respect to the amount of the previous year. At an interest rate of 8% per year, what is the equivalent equal payment series?

Draw the cash flow diagrams. Always use factor notation.

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $219,800. The equipment was expected to have a useful life of three years, or 6,300 operating hours, and a residual value of $18,200. The equipment was used for 2,520 hours during Year 1, 1,953 hours in Year 2, and 1,827 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method.

Note: For all methods, round the answer for each year to the nearest whole dollar.

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

1. Comparing Three Depreciation Methods

   Dexter Industries purchased packaging equipment on January 8 for $274,600. The equipment was expected to have a useful life of three years, or 7,200 operating hours, and a residual value of $22,600. The equipment was used for 2,880 hours during Year 1, 2,232 hours in Year 2, and 2,088 hours in Year 3.

   Required:

   1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method.

   Note: For all methods, round the answer for each year to the nearest whole dollar.

   Depreciation Expense
   Year	Straight-Line Method		Units-of-Activity Method		Double-Declining-Balance Method
   Year 1	$		$		$
   Year 2	$		$		$
   Year 3	$		$		$
   Total	$		$		$

   2. What method yields the highest depreciation expense for Year 1?
   

   3. What method yields the most depreciation over the three-year life of the equipment?
   

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Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000 the third year, $24,000 the fourth year, $28,000 the fifth year, and $34,000 the sixth year. The project would cost the firm $72,000. If the firm's cost of capital is 12%, what is the modified internal rate of return?

18.17%

20.10%

15.71%

13.51%

16.66%

You are evaluating a potential investment in equipment. The equipment's basic price is $163,000, and shipping costs will be $4,900. It will cost another $21,200 to modify it for special use by your firm, and an additional $8,200 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 29,600 at the end of three years. The equipment is expected to generate revenues of $151,000 per year with annual operating costs of $77,000. The firm's marginal tax rate is 40.0%. What is the after-tax operating cash flow for year 2?

$79,914

-$8,871

$74,000

-$14,785

$88,785

Project A has the following Cash Flows: Cost = $1,200,000; Cash flows the following years as follows: Year 1 = $274,600; Year 2 = $298,000; Year 3 = $303,950; Year 4 = $312,875; and Year 5 = $374,600. Calculate the Traditional Payback. Assume cash flows are even throughout the year. Calculate the Net Present Value using the WACC = 8.28%.

Which of the following are correct?
i. The liquidity premium for a 2-year government bond is higher than the liquidity premium for a 5-year government bond.
ii. The liquidity premium for a 3-year government bond is lower than the liquidity premium for a 3-year corporate bond.
iii. The expected return from holding an illiquid two year zero-coupon bond to maturity is higher than the expected return from buying a liquid one-year zero-coupon bond (and holding it to maturity) followed by investing in another liquid one-year zero coupon bond (and holding it to maturity).
iv. The expected one-year rate in one year's time is lower under the Liquidity Premium Hypothesis than the expected one-year rate in one year's time under the Pure Expectations Hypothesis (assuming that two-year bonds are illiquid and one-year bonds are liquid).

The correct answer is:

1. Suppose the data on today’s and future expected interest rates is given:

a) Calculate today’s interest rates on 2-year, 3-year and 4-year bonds using the expectations hypothesis. Use these yields to construct a yield curve and plot it. What kind of shape does it have?

b) Now, suppose term premiums for 2-year, 3-year and 4-year bonds are 0.2%, 0.3% and 0.4%, respectively. Recalculate today’s interest rates on 2-year, 3-year and 4-year bonds using the liquidity premium theory. Use the yields to plot the yield curve on the same graph as expectations hypothesis yield curve from part (a). What do you notice?

Trevor is a single individual who is a cash-method, calendar-year taxpayer. For each of the next two years (year 1 and year 2), Trevor expects to report AGI of $80,000, contribute $8,000 to charity, and pay $2,800 in state income taxes.

A. Assume that Trevor combines his anticipated charitable contributions for the next two years and makes the combined contribution in December of year 1. Estimate Trevor’s taxable income for each of the next two years using the 2018 amounts for the standard deduction.

B. Trevor plans to purchase a residence next year, and he estimates that additional property taxes and residential interest will cost $2,000 and $10,000, respectively, each year. Assume that Trevor makes the charitable contribution for year 2 and pays the real estate taxes for year 2 in December of year 1. Estimate Trevor’s taxable income for year 1 and year 2 using the 2018 amounts for the standard deduction