Homework SourseClearly present the cash flow diagrams equivalency models as
Clearly present the cash flow diagram(s), equivalency model(s),
assumptions made and detailed calculations( please dont post exel tables(
..
If you were to use Double Declining Balance depreciation for an asset which costs $100,000 and had an estimated salvage value of $5,000 and an 8-year useful life, in which year would you switch to straight line depreciation?
Solution
Depreciation p.a under Straight line method = Original Cost- Salvage Value/ life of asset
=$100,000-$5,000/8
=$95,000/8
=$11,875
Depreciation under Straight line is uniform
Depreciation under Double Declining Balance depreciation =1/ life of asset x 2
=(1/8) x 2
=12.5% x 2
=25%
Double Decline Method
Year
Beginning Value of Asset
Dep %
Depreciation
Accumulated Depreciation
Ending Balance of Asset
1
$ 1,00,000
25%
$ 25,000
$ 25,000
$ 75,000
2
$ 75,000
25%
$ 18,750
$ 43,750
$ 56,250
3
$ 56,250
25%
$ 14,063
$ 57,813
$ 42,188
4
$ 42,188
25%
$ 10,547
$ 68,359
$ 31,641
5
$ 31,641
25%
$ 7,910
$ 76,270
$ 23,730
6
$ 23,730
25%
$ 5,933
$ 82,202
$ 17,798
7
$ 17,798
25%
$ 4,449
$ 86,652
$ 13,348
8
$ 13,348
25%
$ 8,348
$ 95,000
$ 5,000
In year 4 we will switch to straight line method as depreciation in Straight line ($11,875 ) is higher than depreciation under double decline method ($10,547)
Which gives higher tax advantage because reduction net income
| Double Decline Method | |||||
| Year | Beginning Value of Asset | Dep % | Depreciation | Accumulated Depreciation | Ending Balance of Asset |
| 1 | $ 1,00,000 | 25% | $ 25,000 | $ 25,000 | $ 75,000 |
| 2 | $ 75,000 | 25% | $ 18,750 | $ 43,750 | $ 56,250 |
| 3 | $ 56,250 | 25% | $ 14,063 | $ 57,813 | $ 42,188 |
| 4 | $ 42,188 | 25% | $ 10,547 | $ 68,359 | $ 31,641 |
| 5 | $ 31,641 | 25% | $ 7,910 | $ 76,270 | $ 23,730 |
| 6 | $ 23,730 | 25% | $ 5,933 | $ 82,202 | $ 17,798 |
| 7 | $ 17,798 | 25% | $ 4,449 | $ 86,652 | $ 13,348 |
| 8 | $ 13,348 | 25% | $ 8,348 | $ 95,000 | $ 5,000 |
