An injection molding machine can be purchased and installed for $90,000. It is i
ID: 1250514 • Letter: A
Question
An injection molding machine can be purchased and installed for $90,000. It is in the seven-year GDS property class and is expected to be kept in service for 8 years. It is believed that $10,000 can be obtained when the machine is disposed of at the end of year eight. The net annual value added that can be attributed to this machine is constant over 8 years and amounts to $15,000. An effective income tax rate of 40% is used by the company, and the after-tax MARR equals 15% per year.b. Determine the GDS depreciation amounts in years one through eight.
Explanation / Answer
When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. You must use the applicable convention in the year you place the property in service and the year you dispose of the property. You figure depreciation for the year you place property in service as follows. Multiply your adjusted basis in the property by the straight line rate. Apply the applicable convention. You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Determine the depreciation rate for the year. Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. Straight line rate. You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. If the number of years remaining is less than 1, the depreciation rate for that tax year is 1.0 (100%).