4 A manufacturing firm purchases some machinery in January f

4. A manufacturing firm purchases some machinery in January for $1,000,000. The machinery has an estimated life of 5 years, with an estimated salvage value of $200,000. The use of this machinery should generate $400,000 before-tax profit each year over its 5-year useful life. Calculate the before-tax and after-tax rates of return if the company uses declining balance at 150% to depreciate their assets.

Solution

CALCULATION OF THE DEPRECIATION AS PER SUM OF DOUBLE DECLINE METHOD Purchase Cost of Machine $      10,00,000 Useful Life = 5 years Depreciation per year = $         2,00,000 (Purchase price / Useful life) CALCULATION OF THE RATE OF DEPRECIATION Rate of Depreciation = Depreciation per year as above / Purchase price of machiene Rate of Depreciation = $         2,00,000 \"/\"By $ 10,00,000 Rate of Depreciation =                     0.20 Rate of Depreciation in percentage = 20% 150% decline deprection rate 30% Purchase price = $      10,00,000 Depreciation for the year 1 @ 30% = $         3,00,000 Closing balance for the year1 $         7,00,000 Opening Balance for the year 2 $         7,00,000 Depreciation for the year 2 @ 30% = $         2,10,000 Closing balance for the year2 $         4,90,000 Opening Balance for the year 3 $         4,90,000 Depreciation for the year 3 @ 30% = $         1,47,000 Closing balance for the year 3 $         3,43,000 Opening Balance for the year 4 $         3,43,000 Depreciation for the year 4 @ 30% = $         1,02,900 Closing balance for the year4 $         2,40,100 Opening Balance for the year 4 $         2,40,100 Depreciation for the year 5 @ 30% = $            72,030 Closing balance for the year5 $         1,68,070 Sale value of machienary = $         2,00,000 Less: Book value as the end of the 5th year $         1,68,070 Gain on sale of investment $            31,930 CALCULATION OF RETURN Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total Income   $         4,00,000 $       4,00,000 $   4,00,000 $    4,00,000 $    4,00,000 $                20,00,000 Less: Depreciation $         3,00,000 $       2,10,000 $   1,47,000 $    1,02,900 $        72,030 $                   8,31,930 Net Income Before Taxation $         1,00,000 $       1,90,000 $   2,53,000 $    2,97,100 $    3,27,970 $                11,68,070 Return Before Taxation= Total Income Before taxation / Total investment - Salvage Value Return Before Taxation= $      11,68,070 \"/ \" By   $ 10,00,000 - $ 2,00,000 Return Before Taxation= $      11,68,070 \"/ \" By   $   8,00,000 Return Before Taxation= 146% Answer = 146% before taxation Note : Tax Rate is not given in solution so unable to calculate return of taxation