Trust Engineering Company is considering the purchase of a new machine to replac
ID: 2786989 • Letter: T
Question
Trust Engineering Company is considering the purchase of a new machine to replace an existing one. The old machine was purchased 5 years ago at a cost of $20,000, and it is being depreciated on a straight line basis to a zero salvage value over a 10-year life. The current market value of the old machine is $14,000. The new machine, which costs $30,000, falls into the MACRS 5-year class and has an estimated life of 5 years. The change in depreciation expense that results from accepting the project and will be considered in the capital budgeting analysis is _____. The MACRS rates for 5-year class are Year 1-20%, Year 2-32%, Year 3-19%, Year4-12%, Year 5-11%, Year 6-6%.
(a) $17,000
(b) $44,000
(c) $10,500
(d) $20,000
(e) $23,400
Explanation / Answer
Market Value of Old Machine =$14,000
Annual Depreciation of Old Machine =$20,000/10 =$2,000
New Machine Cost =$30,000
Annual Depreciation for New Machine over 5 years =$6,000, $9,600, $5,700, $3,600, $3,300, $1,800
Change in depreciation expense over the remaining equipment life =New Depreciation - Old Depreciation
=$30,000 - $10,000
=$20,000
Hence, option-(d) is the right answer.