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Modified Accelerated Cost Recovery System

Problem 1
Suppose new instruments for a firm cost $18,000 with an additional installation fee of $2,000, both of which are depreciable. Complete the depreciation schedule shown below using the Modified Accelerated Cost Recovery System (MACRS) 3-year class.

Year Rate Basis Depreciation
1
2
3
4

Problem 2
A company is evaluating a proposed 4-year project. The depreciable cost will include the following: $300,000 for the equipment, $20,000 for shipping, and $30,000 for installation. The depreciation life is under the MACRS 3-year class, with a salvage value of $45,000. The inventories will rise by $18,000 and accounts payable will rise by $3,000. In addition, the new sales are estimated to be 150,000 units per year at $2.25 per unit. There is a variable operating cost that is 60% of sales and the company's marginal tax rate is 35%. Complete parts (a) through (c) below.
a) Determine the net operating cash flow for the initial year (Year 0).
b) Determine the net operating cash flow for Years 1, 2, and 3.
c) Determine the net terminal year cash flow.

Solution Preview

Problem 1
Suppose new instruments for a firm cost $18,000 with an additional installation fee of $2,000, both of which are depreciable. Complete the depreciation schedule shown below using the Modified Accelerated Cost Recovery System (MACRS) 3-year class.

Year Rate Basis Depreciation
1 33.33 0.3333*2000 = 666.6 0.3333*18000 = 5999.4
2 44.45 0.4445*2000 = 859 0.4445*18000 = 8001
3 14.81 0.1481*2000 = 296.2 0.1481*18000 = 2665.8
4 7.41 0.0741*2000 = 148.2 0.0741*18000 =1333.80

Problem 2
A company is evaluating a proposed 4-year project. The depreciable cost will ...

Solution Summary

The modified accelerated cost recovery systems are examined.

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