A contractor acquires truckmounted concrete pumping equipmen

A contractor acquires truck-mounted concrete pumping equipment. Owing to the initial and operating costs, the contractor is in doubt as to the preferred method for charging depreciation. The contractor considers three methods: straight line, MACRS, and units of production. The facts are as follows: initial cost, $1,460,000; useful life 10 years, and a 20% salvage value. Production output starts at 200 yd^3/hr for a billing year of 2000 hrs. It is estimated that the pumping rate will decline 10yd^3/hr each year. For the data, plot the book value of the asset against time for the methods and select the best choice. Discuss the merits of these allocation schemes. (Hint: The best choice is the minimum book value as time proceeds, thus minimizing taxable income.)

This problem comes from Ostwald, Construction Cost Analysis and Estimating (2001)

Solution

staight line method

calculation of rate of depreciation

= 1/ useful life * 100 = 1/10 * 100= 10%

COST OF THE TRUCK= $1460000 - 20%OF $1460000 = $1168000