Question

Max Metal Inc. uses the same type of production line in the US and Malaysia plants. The first cost was $1,500,000 with a salvage value of $500,000 at the end of year 10. MACRS depreciation with n=5 years is applied in the US and standard SL depreciation with n=10 years is used by the Malaysian facility. a. If the equipment is sold after 6 years for $500,000, calculate the over or under depreciation amounts for each method. b. Use a spreadsheet to plot the book values for both methods on a single graph. (10 points)

Answer 1

Answer a:

Let us first calculate, depreciation, accumulated depreciation and book value of the equipment for both US and Malaysian Facilities for 6 years:

US Facility Accumulated MACRS rate Depreciation Book value Year Cost depreciation $300,000 $780,000 $1,068,000 $1,240,800 $1,413,600 $1,500,000 $1,500,000 $300,000 $480,000 $288,000 $172,800 $172,800 $86,400 $1,200,000 20.00% 1 $1,500,000 $1,500,000 $720,000 32.00% 2. $432,000 $259,200 $86,400 $0 19.20% 3 $1,500,000 11.52% $1,500,000 $1,500,000 11.52% 5 5.76% 6 Malaysian Facility $1,500,000 Cost Salvage value Depreciable base Useful life Annual depreciation $500,000 $1,000,000 10 Years $100,000 Depreciatio Accumulated depreciation Gross Book value Year value n. $1,500,000 $1,500,000 $1,500,000 $100,000 $100,000 $1,400,000 $1,300,000 $1,200,000 $1,100,000 $1,000,000 $900,000 $100,000 $100,000 $200,000 2 $300,000 $1,500,000 $100,000 $100,000 $400,000 $500,000 $600,000 4 $1,500,000 $1,500,000 5 $100,000 6

At the end of 6 years equipment is sold for $500,000

As such:

At US facility over-depreciation = 500000 - 0 = $500,000

At Malaysian facility under -depreciation = 900000 - 500000 = $400,000

Hence:

At US facility (MACRS) over-depreciation = $500,000

At Malaysian facility(SLM) under -depreciation = $400,000

Answer b:

$1,600,000 MACRS Book Value SLM Book value Year $1,400,000 $1,300,000 $1,200,000 $1,200,000 $1,400,000 1 $720,000 2. $1,200,000 $432,000 3 $1,000,000 $259,200 $1,100,000 $86,400 $1,000,000 5 +MACRS Book Value $800,000 $0 $900,000 6 SLM Book value $0 $800,000 $600,000 7 $0 $700,000 $400,000 $0 $600,000 $0 $500,000 $200,000 10 $0 Years-- 1 2 4 5 6 7 8. 9 10