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Homework 6

1. (Chapter 8) A city government is considering two types of town-dump sanitary systems. Design A requires an initial outlay of $500,000 with annual operating and maintenance costs of $75,000 for the next 20 years; design B calls for an investment of $400,000 with annual operating and maintenance costs of $95,000 per year for the next 20 years. Fee collections from the residents would be $100,000 per year. The interest rate is 10%, and no salvage value is associated with either system.

 

	Design A	Design B
Capital cost	$500,000	$400,000
Revenue cost	$75000*$20=$1,500,000	$95,000*$20=$1,900,000
TOTAL	$2,000,000	$2,300,000

By the benefit-cost ratio (BC (i)), which system should be selected?

The city government should consider design A. though it has a high initial cost, its revenue cost is low therefore it will generate a high revenue than design B considering other external factors constant.

 

2. (Chapter 9) Identify which of the following expenditures is considered as a capital expenditure that must be depreciated (capitalized):

 

a) Purchased a fax machine for $10,000.

Must be capitalized.

b) Painted the warehouse building, both interior and exterior, for $20,000.

Should not be capitalized

c) Installed a water dispenser in a company dining area for $2500.

Must be capitalized.

d) Paid $15,000 to lease a dump truck for six months.

Should not be capitalized

e) Purchased a patent on an energy-saving device over five years at a cost of $35,000.

Should not be capitalized- patent has no useful life hence cannot be depreciated.

f) Purchased a spare part for a framing machine for $4,000.

Should not be capitalized

g) Repaved a parking lot for $20,000.

Should not be capitalized

h) Installed a conveyor belt system to automate some part of a production processes for $50,000.

Should not be capitalized

i)        Purchased land to build a new facility for $350,000.

 Should not be capitalized

 

3. (Chapter 9) Consider the following date on an asset:

 1

Cost of the asset, I:     $150,000

Useful life, N:             5 years

Salvage value, S:         $16,000

 

Compute the annual depreciation allowances and the resulting book values, using the following methods:

a) The straight-line depreciation method,

(Cost of the asset- salvage value)/(useful life N)

($150000-$16000)/(5)= $26,800

b) The double-declining-balance method.

Depreciation for a period=2*straight line depreciation percent*[(book value at beginning of period-salvage value)-accumulated depreciation)]. 

Year 1

Depreciation= ((2*5)/100)%*[$150000-$16000] = $13,400

Year 2

((2*5)/100)%*[$134000-$13400] = $12,060

Year 3

((2*5)/100)%*[$120,600-$12,060] = $10,854

Year 4

((2*5)/100)%*[$108,540-$10,854] = $9,768.6

Year 5

((2*5)/100)%*[$97,686-$9,768.6] = $8,794.74