Question

There are two vendors submitting bids for a new parking lot gate. The first company expects the gate to last 5 years. The second company expects their gate to last 6 years. Both companies provide quotes for purchase price, operating costs, and estimated future salvage value. Explain the three methods for considering the difference in service life for these two products that are being considered (10 points) A company has a choice between 2 projects. The first option requires an investment of $20000 now and has expected annual revenue of $12000. The second option requires an investment of $31000 and has expected annual revenue of $15000. If the company expects the project to last 5 years, and has an MARR of 12%, which project should be selected, using incremental rate of return analysis? (15 points)

Answer 1

Answer:

Types of Depreciation Method:

1. Straight line method
2. Double Declining Balance Depreciation Method
3. Units of Production Depreciation Method.

1. Straight line method:
In this method results in equal depreciation expenses spread evenly over the course of the assets useful life.

Depreciation Expense = (Cost – Salvage value) / Useful life

2. Double Declining Balance Depreciation Method

The double declining balance depreciation (DDB) method is one of two common methods a business uses to account for the expense of a long-lived asset. The double declining balance depreciation method is an accelerated depreciation method that counts as an expense twice as much of the asset’s book value each year compared to straight-line depreciation.

Periodic Depreciation Expense = Beginning book value x Rate of depreciation

Expense = (100% / Useful life of asset) x 2

Multiply the rate of depreciation by the beginning book value to determine the expense for that year

Subtract the expense from the beginning book value to arrive at the ending book value.

do it for the second company also....

3. Units of Production Depreciation Method:

In units of production method, higher depreciation is charged when their is higher activity and less is charged when there is low level of operation. Zero depreciation is charged when the asset is idle for the whole period. This method is similar to straight-line method except that life of the asset is estimated in terms of number of operations or number of machine hours etc.

Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage value)