TriX industries want to expand its production facilities at

Tri-X industries want to expand its production facilities at a cost of $500,000. The equipment is expected to have an economic life of 8 years, have a 7-year property class and have a resale value of $55,000 after eight years of use. The annual operating cost is expected to be $12,000 for the first year and to increase by $750 per year thereafter. If the equipment is purchased, Tri-X wants to compare the straight line depreciation method to the MACRS method. If the MARR is 9% for present worth approximations, should Tri-X use the straight line method or MACRS method? Create a depreciation schedule for both methods. Show all of your work.

Solution

The lower the Present Worth (PW) accumulated depreciation over project life (8 years), the lower the total (accounting) cost and the higher the taxable income and net profit, ceteris paribus. Since annual operating cost is the same for either depreciation method, the preferred depreciation method is that one which results in lower PW of total accumulated depreciation. PW of total accumulated depreciation for 8 years is computed as follows, for both methods. Note that

= $(500,000 - 55,000) / 8 = $445,000 / 8 = $55,625

MACRS Method

Since SLM method has lower PW of accumulated depreciation over project life, this method should be selected.