An equipment company purchased a machine 5 years ago at a cost of $100,000. It h
ID: 2728086 • Letter: A
Question
An equipment company purchased a machine 5 years ago at a cost of $100,000. It had an expected life of 11 years at the time of purchase and an expected salvage value of $10,000 at the end of the 11 years. It is being depreciated by the straight-line method toward a salvage value of $10,000. A new machine can be purchased for $150,000. Over its 6-year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. Straight-line depreciation will be used over its 6-year economic life. The old machine can be sold today for $65,000. The firm's tax rate is 34 percent. The firm’s WACC is 12 percent. i have already seen the answer to this question howver i would like you to explain how the Depreciation on Existing Machine 8,181.82 Additional depreciation 16,818.18 were calculated... thank you in anticipation
Explanation / Answer
Details Amt $ Old machine cost 100,000 Less salvage value 10,000 Depreciable value 90,000 Usefull life in years 11 SL depreciation per year =90000/11= $ 8,181.82 Now for new machine ; Cost of new Machine 150,000 Less salvage value - Depreciable value 150,000 Usefull life in years 6 Annual depreciation by SL method = $ 25,000.00 So , Annual Depreciation of New Machine $ 25,000.00 Less Annual depreciation old machine = $ 8,181.82 Incremental depreciation for new machine = $ 16,818.18 Hope it is clear now;