Depreciation

1. What is meant by depreciation?

2. How does depreciation affect a company's cash flow?

3.

State the difference between book depreciation and tax depreciation.

4.

Explain why the recovery period used for tax depreciation purposes may be different from the

estimated n value in an engineering economy study.

5. Identify the different methods for determining depreciation of assets.

6.

An asset that is book-depreciated over a 5-year period by the straight-line method has BV3 $62,000

with a depreciation charge of $26,000 per year. Determine (a) the first cost of the asset and (b) the

assumed salvage value.

7. Bristol Myers Squibb purchased a tablet-forming machine in 2008 for $750,000. The company planned

to use the machine for 10 years; however, due to rapid obsolescence it will be retired after only 4 years

in 2012. Develop a spreadsheet for depreciation and book value amounts necessary to answer the

following

(a) What is the amount of capital investment remaining when the asset is prematurely retired?

(b) If the asset is sold at the end of 4 years for $175,000, what is the amount of capital investment lost

based on straight line depreciation?

(c) If the new-technology machine has an estimated cost of $300,000, how many more years should the

company retain and depreciate the currently owned machine to make its book value and the first cost of

the new machine equal to each other.

8. A. 120-metric-ton telescoping crane that cost $320,000 is owned by Upper State Power. Salvage is

estimated at $75,000. (a) Compare book values for MACRS and standard SL depreciation over a 7-

year recovery period. (b) Explain how the estimated salvage is treated using MACRS.

9. Vesco Mineral Resources purchased mineral rights to land in the foothills of the Santa Cristo

mountains. The cost of the purchase was $9 million. Vesco originally thought that it would be able to

extract 200,000 tons of lignite from the land, but further exploration revealed that 280,000 tons could

be economically removed. If the company sold 20,000 tons in year 1 and 30,000 tons in year 2, what

would the depletion charges be each year according to the cost depletion method?