a machine with a 5 year tax depreciation recovery period has

a machine with a 5 year tax depreciation recovery period has a first cost of 100000$ with no salvage value. its annual operating cost is $6000 per year

(Q.) calculate the pw of total depreciation using ddb method?

Solution

a) The Present Worth (PW) of total depreciation using the Double declining balance method (DDB) method:-

   = (Cost of assets - Residual value) / Useful life of asset

   = (100000 - 0) / 5

   = 100000 / 5

= $ 20000

Note:- Residual value/ Salvage value of machine given in the question is NIL.

Rate of depreciation in case of DDB method can be calculated as follows:-

Rate of depreciation = 20000 / 100000

= 0.20 i.e., 20 % (This is rate used for Straight line method.)

Rate of depreciation in case of Double declining method (DDB) method = 20 * 2 = 40 %

Cost of Machine

(-) Depreciation for first year (40 % of 100000)

100000

40000

Book value at the end of Year 1 / at the begining of year 2

(-) Depreciation for second year ( 40 % of 60000)

60000

24000

Book value at end of second year / at the begining of year 3

(-) Depreciation for third year (36000 * 40%)

36000

14400

Book value at end of Third year / at the begining of year 4

(-) Depreciation for fourth year (21600 * 40%)

21600

8640

Book value at end of fourth year / at the begining of year 5

(-) Depreciation for fifth year (12960 * 40%)

12960

5184

The Present Worth (PW) of total depreciation using the Double declining balance method (DDB) method:-

= 40000 + 24000 + 14400 + 8640 + 5184

= $ 92224

Conclusion:- The Present Worth (PW) of total depreciation using the Double declining balance method (DDB) method = $ 92224