IEE 300 HW#2 Solution

Chapter 16.
16.7

(a) B = $350,000 + 40,000 = $390,000

n = 7 years
S = 0.1(350,000) = $35,000
(b) Remaining life = 4 years
Market value = $45,000
Book Value = $390,000(1 0.65)
= $136,500

16.8
Year
0
1
2
3
4
5

Book
Value
$100,000
90,000
81,000
72,900
65,610
59,049

Part (a)
Annual
Depreciation
0
$10,000
9000
8100
7290
6561

Part (b)
Depreciation
Rate____
----10 %
9
8.1
7.3
6.56

(c) Book value = $59,049 and market value = $24,000.

So, the difference is $35,049.
(d) Plot year versus book value in dollars for the table above

16.10 (a) By hand: B = $400,000

S = 0.1(300,000) = $30,000
Dt = (400,000-30,000)/8 = $46,250 per year t ( t = 1,,8)
BV4 = 400,000 4(46,250) = $215,000
(b) Using Excel: Set up cell equations for depreciation and book value to obtain the same
answers as in (a). Spreadsheet shown below.

IEE 300 HW#2 Solution

(c) Change the cell values to B= $350,000 (C3) and n = 5 (C6). Use the same relations.
S = $35,000
Dt = $83,000
BV4 = $118,000
One spreadsheet is used here to indicate answers to both parts.

16.15 Use a difference relation (US minus EU) for depreciation and BV in year 5 with the SLN
function.

16.17 (a) B = $50,000, n = 3, d = 2/n = 2/3 = 0.6667 for DDB

Annual depreciation = 0.6667(BV of previous year)
Year
0

Depreciation, Accumulated
Eq. [16.5]
depreciation
-

Book
value
$50,000

IEE 300 HW#2 Solution

1
2
3

$33,335
11,112
3,704

$33,335
44,447
48,151

16,667
5,555
1,851

(b) Use the function DDB(50000,0,3,t,2) for annual DDB depreciation in column B. The
plot is developed using Excels xy scatter chart function

=DDB(50000,0,3,3,2)

16.19 B = $800,000; n = 30; S = 0

(a)

(b)

Straight line depreciation:

Dt = 800,000 = $26,667
30

t = 5, 10, 25, and all other years

Double declining balance method: d = 2/n = 2/30 = 0.06667

D5 = 0.06667(800,000)(10.06667)5-1 = $40,472
D10 = 0.06667(800,000)(10.06667)10-1 = $28,664
D25 = 0.06667(800,000)(10.06667)251 = $10,183
The annual depreciation values are significantly different for SL and DDB.

(c)

D30 = 800,000(10.06667)30 = $100,959

16.27 (a) SL Depreciation each year = (30,000 2000)/7 = $4000

Straight line method
MACRS method
Year
0
1
2
3

Depr
$4,000
4,000
4,000

Book value
$30,000
26,000
22,000
18,000

d rate
0.1429
0.2449
0.1749

Depr
$4,287
7,347
5,247

Book value_
$30,000
25,713
18,366
13,119

IEE 300 HW#2 Solution

4
5
6
7
8

4,000
4,000
4,000
4,000
0

14,000
10,000
6,000
2,000
2,000

0.1249
0.0893
0.0892
0.0893
0.0446

3,747
2,679
2,676
2,679
1,338

9,372
6,693
4,017
1,338
0

16.28 (a) and (b) For MACRS use Table 16.2 rates for n = 5. For DDB, with d = 0.2857, stop
depreciating at S = $10,000.

Year

d rate
0
1
0.20
2
0.32
3

(a)
(b)
MACRS
DDB________
Depr
BV
Depr
BV__
$50,000
$50,000
$10,000
40,000
$14,285
35,715
16,000
24,000
10,204
25,511
0.192
9,600
14,400
7,288

18,222
4
5
6
7

0.1152
0.1152
0.0576
-

5,760
5,760
2,880

8,640
2,880
0
0

5,206
3,016*
-

*D5 = 0.2857(13,016) = $3,719 is too large since BV < $10,000

MACRS depreciates to BV = 0 while DDB stops at S = $10,000.
16.34 (a)

Use Equation [16.15] for cost depletion factor.

pt = 1,100,000/350,000 = $3.143 per ounce
Cost depletion, 3 years = 3.143(175,000) = $550,000

(b)

Remaining investment = 1,100,000 550, 000= $550,000

New pt = 550,000/100,000 = $5.50 per ounce

(c)

Cost depletion: $Depl = 35,000(5.50) = $192,500

Percentage depletion: %Depl = 15% of gross income
= 0.15(35,000)(5.50) = $28,875
From Equation [16.17], %Depl < $Depl;
depletion for the year is $Depl = $192,500

Chapter 17.
17.3

(a) Net profit after taxes

(b) Taxable income
(c) Depreciation
(d) Operating expense
(e) Taxable income

13,016
10,000
10,000
10,000

IEE 300 HW#2 Solution

17.4

(a) Company 1
TI
= Gross income - Expenses - Depreciation
= (1,500,000 + 31,000) 754,000 148,000
= $629,000
Taxes = 113,900 + 0.34(629,000 335,000)
= $213,860
Company 2
TI
= (820,000 + 25,000) 591,000 18,000
= $236,000
Taxes = 22,250 + 0.39(236,000 100,000)
= $75,290
(b) Co. 1:
Co. 2:

213,860/1.5 million = 14.26%

75,290/820,000 = 9.2%

(c) Company 1
Taxes = (TI)(Te) = 629,000(0.34) = $213,860
% error with graduated tax = 0%
Company 2
Taxes = 236,000(0.34) = $80,240
% error = 80,240 75,290 (100%) = + 6.6%
75,290
17.5

Taxes using graduated rates:

Taxes on $300,000: 22,250 + 0.39(200,000)
= $100,250
(a) Average tax rate = 100,250/300,000 = 34.0%
(b) 34% from Table 17.1
(c) Taxes = 113,900 + 0.34(165,000) = $170,000
Average tax rate = 170,000/500,000 = 34.0%
(d) Marginal rate is 39% for $35,000 and 34% for $165,000. Use Eq. [17.3].
NPAT = 200,000 0.39(35,000) 0.34(165,000) = $130,250

17.9

(a) GI = 98,000 + 7500 = $105,500

TI = 105,500 10,500 = $95,000
Using the rates in Table 17-2:
Taxes
= 0.10(7000) + 0.15(28,400-7000)
+ 0.25(68,800 28,400) + 0.28(95,000 68,800)
= 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(26,200)
= $21,346

IEE 300 HW#2 Solution

(b) 21,346/98,000 = 21.8%

(c) Reduced taxes = 0.9(21,346) = $19,211
From part (b), taxes are determined from the relation below where x = new TI.
Taxes = 19,211 = 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(TI 26,200)
= 700 + 3210 + 10,100 + 0.28(x 68,800)
= 14,010 + 0.28(x 68,800)
0.28x = 24,465
x = $87,375
From part (a),set TI = $87,375 and let y = new total of exemptions and deductions
TI = 87,375 = 105,500 y
y = $18,125
Total would have to increase from $10,500 to $18,125, which is a 73% increase. This is
not likely to be possible.
17.26 1. Since land does not depreciate,
CG = TI = 0.15(2.6 million) = $390,000
Taxes = 390,000(0.30) = $117,000
2. SP = $10,000
BV5 = 155,000(0.0576) = $8928
DR = SP BV5 = $1072
Taxes = DR(Te) = 1072(0.30) = $322
3. SP = 0.2(150,000) = $30,000
BV7 = $0
DR = SP BV7 = $30,000
Taxes = 30,000(0.3) = $9000
17.27 1. CL = 5000 500 = $4500
TI = $4500
Tax savings = 0.40(4500) = $1800
2. CG = $10,000
BV1 = $100,000(1-0.2) = $80,000
DR = 100,000 80,000 = $20,000
TI = CG + DR = $30,000
Taxes = 30,000(0.4) = $12,000
17.29 (a) Use MACRS rates for n = 5
BV2 = 40,000 - 0.52(40,000) = $19,200
There is depreciation recapture (DR)

IEE 300 HW#2 Solution

DR = 21,000 19,200 = $1800
TI = GI E D + DR
= 20,000 3000 0.32(40,000) + 1800 = $6,000
Taxes = 6,000(0.35) = $2100
(b) CFAT = GI E + SP taxes
= 20,000 3000 + 21,000 2100
= $35,900