# SIT’s Computer department recently purchased 100 new sever machines with a total initial cost of $120,000, and with an estimated salvage value of $20,000 at the end of 3- year useful life. Using the straight-line method: a. Calculate the annual depreciation allowances. [5 points] b. Calculate the annual book values. [5 points]

QUESTION 1:

SIT’s Computer department recently purchased 100 new sever machines with a total

initial cost of $120,000, and with an estimated salvage value of $20,000 at the end of 3-

year useful life. Using the straight-line method:

a. Calculate the annual depreciation allowances. [5 points]

b. Calculate the annual book values. [5 points]

QUESTION 2:

Fred’s Fabrication, Inc. bought a 50-kilowatt gas turbine that costs $40,000. It is

estimated that the machine will have a depreciated salvage value of $5,000 at the end

of its 3 – year useful life. Use the double-declining balance method:

a. Calculate the annual depreciation allowances. (Please ignore the depreciation

adjustment at this time) [4 points]

b. Calculate the annual book values. (Please ignore the depreciation adjustment at this

time) [4 points]

c. What do you notice about the book value at the end of year 3? What does this

mean? [1 + 1 point]

QUESTION 3:

Vermont wood manufactures Inc. purchased a light duty delivery truck for $32,000 that

has a 7-year service life. At the end of 7th year, it will be sold at a salvage value of

$3000. The light duty delivery truck has been depreciated according to a 7 year MACRS

property class.

a. Calculate the annual depreciation allowances over 7 years. [4 points]

b. Calculate the annual book values over 7 years. [4 points]

c. Is there a capital gains or loss and if so, how much is the gain / loss? [1 + 1 point]

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EM 600 Engineering Economics and Cost Analysis, Homework #3

School of Systems & Enterprises, Stevens Institute of Technology

“I PLEDGE MY HONOR THAT I HAVE ABIDED BY THE STEVENS HONOR SYSTEM”

By: ______________________________

EM600-Fall13-HW3 Page 2 of 2

QUESTION 4:

Honda Motor Co. decides to upgrade a new assembly line to increase productivity. This

upgrade requires an initial investment of $3,200,000 and will generate $850,000

revenue in year 1 of operation. The system will incur $250,000 in maintenance

expenses in the first year. The investment cost of all the equipment necessary for

upgrading is classified as a 5-year MACRS property for depreciation purposes. The

expected salvage value of all the equipment is $200,000 at the end of the project life.

The firm pays taxes at a rate of 25% and has a MARR of 18%. The assembly lines have

a 6-year life. Revenues for operation will increase at 5% each year and expenses will

increase at 3% each year. A loan is to be taken out for 28% of the initial investment

amount. The loan will be repaid over the project life in yearly payments, at an annual

interest rate of 15%.

Calculate the following:

a. Determine the allowed depreciation amounts [3 points]

b. Calculate the repayment schedule of the loan [3 points]

c. Calculate the Gains/Losses associated with Asset Disposal [1 points]

d. Create the Income Statement [5 points]

e. Develop a Cash Flow Statement [5 points]

f. Is this project justifiable at a MARR of 18%?

Calculate the NPV [1 point]

Calculate IRR [1 point]

State your conclusions. [1 point]