# Depreciation method, Capital Budheting

PROBLEM #1A

Given the data below, identify the depreciation method used for each depreciation schedule as of the following (please note that it is not necessary to show all calculations, but enough to show how you know which method is represented):

First cost $80,000

Book depreciation life 7 years

MACRS property class 7-year

Salvage value $24,000

Depreciation Schedule

N A B C D

1 $14,000 22,857 11,429 22,857

2 12,000 16,327 19,592 16,327

3 10,000 11,661 13,994 11,661

4 8,000 5,154 9,996 8,330

5 6,000 0 7,140 6,942

6 4,000 0 7,140 6,942

7 2,000 0 7,140 6,942

8 0 0 3,570 0

Here are the choices . . .

DDB with conversion to straight-line, assuming a zero salvage value

MACRS 7-year (with half-year convention of course) -- under MACRS, the salvage value is always treated as zero.

PROBLEM #1B

For each of the following cash flows, calculate the payback period (to two places after the decimal, i.e. 7.95 years not 8 years):

Project's Cash Flow ($)

N A B C D

0 ($1,700) ($4,200) ($4,800) ($3,300)

1 300 2,000 2,000 5,000

2 300 1,500 2,000 3,000

3 300 1,500 2,000 -2,000

4 300 500 5,000 1,000

5 300 500 5,000 1,000

6 300 1,500 2,000

7 300 3,000

8 300

PROBLEM #1C

Best Friends Manufacturing is purchasing a large tract of land for a new facility. Its loan is for $3 million at an interest rate of 10% and it will be paid off in 15 equal annual payments. If Best Friends' borrowed principal were to change by plus or minus 10%, the interest rate by plus or minus 2.0%, the number of years to be between 10 years and 30 years, which changes would be most significant to the equal annual payments?

Use a spider plot. The Spider Plot must be drawn, labeled, and shown as part of the problem.

Which changes would be most significant to the equal annual payments?

PROBLEM #1D

Consider two investments A and B with the following sequences of cash flows:

Net Cash Flow

n Project A Project B

0 ($120,000) ($100,000)

1 20,000 15,000

2 20,000 15,000

3 120,000 130,000

(a) Compute the IRR for each investment.

(b) At an MARR = 16%, determine the acceptability of each project.

(c) If A and B are mutually exclusive projects, which project would you select based on the rate of return?

(See attached file for full problem description)

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#### Solution Summary

Answers questions on Depreciation method, Payback, Equal annual payments, NPV and IRR