ENGR301 Engineering Management Principles and Economics

Tutorial 11 – Depreciation

1. The beginning of the year the Acme Chemical Company bought $45,000 of research
equipment, which it believes will have a zero salvage value at the end of its 5-year life.
Compute the depreciation schedule for the equipment by each of the following methods:
a. Straight-line
b. Sum-of-year’s-digits
c. Double-declining-balance
d. CCA as a Class 8 asset (rate = 20%)

Cost of equipment = $45,000

Salvage = $0

Time (t) = 5 years

(a)

Straight-line method = (Cost – Salvage)/Time

= ($45,000 – 0)/5

= $9,000 depreciation each year

(b)

SOYD = N (N + 1)/2 = 5 × 6/2= 15

dt =(N–t+1)(B–S)/SOYD

Where B = Cost of asset

S = Salvage value

SOYD = Sum of years’ digits

N = Life of asset

dt = Depreciation charge in any year

Using the formula above:

d1 = (5 – 1 + 1) ($45,000 – $0)/15 = 5× $45,000/15 = $15,000

d2 = (5
5 – 2 + 1) ($
$45,000 – $0
0)/15 = 4× $4
45,000/15 = $12,000

d3 = (5
5 – 3 + 1) ($
$45,000 – $0
0)/15 = 3× $4
45,000/15 = $9,000

d4 = (5
5 – 4 + 1) ($
$45,000 – $0
0)/15 = 2× $4
45,000/15 = $6,000

d5 = (5
5 – 5 + 1) ($
$45,000 – $0
0)/15 = 1× $4
45,000/15 = $3,000

(c)

Cost = $4
45,000

Salvage = $0

Time = 5 years

DDB dt = 2/N (BVt–1)

Where d = Depreciattion

t = Any particular
p yea
ar

N = Total life in years

s

(d) As pe me tax guide, for Class 8 the Capital Cost Allowa

er the corporration incom ance
(deprecia
ation percentage) is 20%% per year.

Cost of Equipment
E = UCC0 = $45
5,000

Time = 5 years

CCA rate
e, d = 20%
Undepreciated Capital Cost, UCCt = UCCt–1 – CCAt

Need to apply the 50% rule in year 1

Year, t CCAt=d*UCCt-1 UCCt

0 45,000.0
1 0.5*0.2*45,000= 4,500.0 40,500.0
2 0.2*40,500= 8,100.0 32,400.0
3 0.2*32,400= 6,480.0 25,920.0
4 0.2*25,920= 5,184.0 20,736.0
5 0.2*20,736= 4,147.2 16,588.8

2. A company that manufactures food and beverages in the vending industry has purchased
some handling equipment that cost $75,000 and will be depreciated as a Class 43 asset
(rate =30%). Show in a table the yearly depreciation amount and book value of the asset
over 10 years of depreciation life.

Year Book Value at Depreciation Amount Book Value at the end of year
beginning of year
1 $75,000 $75,000*0.5*0.3 = $11,250 $75,000 - $11,250 = $63,750
2 $63750 $63750*0.3 = $19125 $63750 - $19125 = $44,625
3 $44,625 $44,625*0.3 = $13,387.50 $44,625 - $13,387.5 = $31,237.5
4 $31,237.5 $31,237.5*0.3 = $9371 $31,237.5 - $9371 = $21,866
5 $21,866 $21,866*0.3 = $6559 $21,866 - $6559 = $15,306
6 $15,306 $15,306*0.3 = $4591 $15,306 - $4591 = $10714
7 $10714 $10714*0.3 = $3214 $10714 - $3214 = $7499
8 $7499 $7499*0.3 = $2249 $7499 - $2249 = $5249
9 $5249 $5249*0.3 = $1574 $5249 - $1574 = $3674
10 $3674 $3674*0.3 = $1102 $3674 - $1102 = $2571

3. Paquita wants to estimate the scrap value (salvage value) of a smokehouse 20 years after
purchase. She feels the depreciation is best represented using the declining balance
method, but she doesn’t know what depreciation rate to use. She observes that the
purchase price of the smokehouse was $245,000 three years ago, and an estimate of its
current salvage value is $180,000. What is a good estimate of the value of the smokehouse
after 20 years?

d=1– /
d=1- 180,000/245,000
d = 0.097663

Using the declining balance method, the BV at t=20, i.e. an estimate of the salvage value is:
245,000(1-0.097663)20 = $31,372
 ENGR 301 Principles of Engineering Management and Economics

Tutorial 12 Taxation and Inflation ‐ Solution

Please bring a copy of this to your tutorial

14.2 What is the approximate after‐tax IRR on a two‐year project for which the first cost is $12,000,
savings are $5000 in the first year and $10,000 in the second year, and taxes are at 40%?

14.2 Before‐tax IRR:

5000(P/F, i, 1) + 10 000(P/F, i, 2) – 12 000 = 0
At i = 0.14: LHS = 80.64
At i = 0.15: LHS = –90.73
Interpolation: IRR = 14.47%
Approximate after‐tax IRR = 0.1447(1 – 0.4) = 0.0868
The after‐tax IRR is approximately 8.68%

14.3 Waterloo Industries pays 40% corporate income taxes and its after‐tax MARR is 18%. A project
has a before‐tax IRR of 24%. Should the project be approved? What would your decision be if the
after‐tax MARR were 14%?

8.3 IRRafter‐tax ≅ IRRbefore‐tax × (1 – t) = 0.24(1 – 0.40) = 0.144

The after‐tax IRR is approximately 14.4%. For an after‐tax MARR of 18%, the project should not be
approved. However, for an after‐tax MARR of 14%, since the after‐tax IRR is an approximation, a more
detailed examination would be advisable.

14.7,8 A company’s first and second year operations can be summarized as follows:
Revenues/yr: $110 000
Expenses/yr (except CCA): $65 000
Capital asset purchases in the first year totaled $100 000, and none in the second year.

14.7 With a CCA rate of 20% and a tax rate of 55%, how much income tax was paid in year 1?
14.8 With a CCA rate of 20% and a tax rate of 55%, how much income tax was paid in year 2?

14.7 First year CCA is on $100 000 and 50% rule applies. So, amount is 0.5*100 000*0.2 = 10 000

Net income = 110 000 – 65 000 – 10 000 = $35 000

Taxes paid = 35 0000.55 = $19 250

14.8 Second year CCA is on ($100 000 – $10 000) = $90 000.

Net income = 110 000 – 65 000 – 90 000(0.2) = 45 000 – 18 000 = $27 000

Taxes paid = 27 0000.55 = $14 850

15.8 Inflation is expected to be about 4% per year over the next 50 years. How much would you
expect to pay 50 years from now for each of the following:
(a) $1.59 hamburger
(b) $16,000 car
(c) $180 000 house

15.8 We have a present value for which we want to find a future value. So, need to use (F/P,4%,50)
= 1.0450

(a) 1.59(F/P, 4%, 50) = 1.59(7.1067) = $11.30 for the hamburger.

(b) 16 000(F/P, 4%, 50) = 16 000(7.1067) = $113 707 for the car.

(c) 180 000(F/P, 4%, 50) = 180 000(7.1067) = $1 279 for the house.

Eight years ago various building supplies were bought $80,000. Today, those same building supplies
can be bought for $120,000. What is the average inflation rate f over this eight year period?

80,000(1+f)8 = 120,000

1+f = (120,000/80,000)1/8

f = 1.052 – 1 = 0.052 = 5.2%