Question

The Hillside Machine Shop expects to have an annual taxable income of $425,000 from its regular business over the next six years. The company is considering acquiring a new milling machine during year 0. The machine's price is $188,800 installed. The machine falls into the MACRS seven-year class, and it will have an estimated salvage value of $58,000 at the end of six years. The machine is expected to generate additional before-tax revenue of $92,000 per year. The corporate tax rate is 21%. LOADING... Click the icon to view the MACRS depreciation schedules. Question content area bottom Part 1 (a) What is the total amount of economic depreciation for the milling machine if the asset is sold at $58,000 at the end of six years? The amount of economic depreciation is $enter your response here. (Round to the nearest dollar.)

          The Hillside Machine Shop expects to have an annual taxable income of $425,000 from its regular business over the next six years. The company is considering acquiring a new milling machine during year 0. The machine's price is $188,800 installed. The machine falls into the MACRS seven-year class, and it will have an estimated salvage value of $58,000
at the end of six years. The machine is expected to generate additional before-tax revenue of $92,000 per year. The corporate tax rate is 21%.
LOADING...  Click the icon to view the MACRS depreciation schedules.
Question content area bottom
Part 1
(a) What is the total amount of economic depreciation for the milling machine if the asset is sold at $58,000 at the end of six years? 
The amount of economic depreciation is $enter your response here. (Round to the nearest dollar.)

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Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Supreeta N

06/26/2023

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Economic depreciation is the difference between the initial cost of the asset and its salvage value at the end of its useful life. Show more…

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The Hillside Machine Shop expects to have an annual taxable income of $425,000 from its regular business over the next six years. The company is considering acquiring a new milling machine during year 0. The machine's price is $188,800 installed. The machine falls into the MACRS seven-year class, and it will have an estimated salvage value of $58,000 at the end of six years. The machine is expected to generate additional before-tax revenue of $92,000 per year. The corporate tax rate is 21%. LOADING... Click the icon to view the MACRS depreciation schedules. Question content area bottom Part 1 (a) What is the total amount of economic depreciation for the milling machine if the asset is sold at $58,000 at the end of six years? The amount of economic depreciation is $enter your response here. (Round to the nearest dollar.)

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Transcript

00:01 Hello students, here is a question.

00:02 A group of businessmen formed a corporation to lease for 5 years a piece of land at the intersection of two busy streets.

00:11 The corporation has invested $50 ,000 in car washing equipment.

00:16 They will depreciate the equipment by the sum of an year.

00:18 Digit depreciation will be $5 ,000 as a salvage value.

00:22 So, it is for 5 years useful life.

00:25 The corporation is expected to have before tax cash flow after meeting all the expenses like operation $20 ,000 first year and declining $3 ,000 per year in future years.

00:36 The second year is $17 ,000, third year is $14 ,000.

00:40 The corporation has an income, so it is taxed combined corporate tax of 20%.

00:46 The projected income for this equipment sold will be $5 ,000 at the end of 5 years.

00:52 What is after tax rate of return the corporate received from the venture? so, this is our question.

00:58 Let us start solving this.

01:00 First thing is to determine the depreciation by using sum year digit method.

01:13 So, that will be syd is equal to n into n plus 1 divided by 2, which gives us 5 into 5 plus 1 divided by 2, which comes to 15.

01:31 So, consider this depreciation for sum of an year that will be calculation of depreciation of sum of years.

01:49 First column will be years, remaining useful life syd, applicable percentage, annual depreciation.

02:13 So, the number of years will be 5 years, 1, 2, 3, 4 and 5 years and remaining useful life will be first year, second will be 4 years, third will be 3 years, fourth will be 2 years, fifth will be 1 year.

02:30 So, syd comes to 5 divided by 15, 4 divided by 15, 3 divided by 15, 2 divided by 15 and 1 divided by 15...

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