Units Per unit

Sales 10,000 1,200 12,000,000

10,500 2,000 21,000,000

Depreciation Method: Cost of asset = 200,000, useful life = 5 years, residual value
Streight Line: Dep: (Cost of asset - Residual value)/estimated useful life

Double declining: Dep Rate: (1/useful life) x 200 1/5 x 200 40

SL DD
Sales 800,000 800,000
Less CGS 500,000 500,000
GP 300,000 300,000
Less S&A (without Dep) 100,000 100,000
Profit before Dep&Tax 200,000 200,000
less Dep 36,000 80,000
Profit before tax 164,000 120,000 •Everything else equal, the greater the depreciation charg
Less Tax 40% 65,600 48,000 the taxes paid by the firm.

Assets sold on >>>>> Profit Loss

Operating Profit 200,000 200,000
Gain on sale of asset 20,000
Loss on sale of asset 10,000
Profit before tax 220,000 190,000
Less Tax 40% 88,000 76,000 Taxes (savings) due to the of “old” asset(s) if replaceme
if there has been no sale of asset
Operating Profit 200,000 200,000
Less Tax 40% 80000 80000

Increase/decrease in tax 8,000 (4,000)

ul life = 5 years, residual value = 20,000
(200,000 - 20,000)/5 36,000

200,000 x 40% 80,000

er the depreciation charges, the lower

paid by the firm.

e of “old” asset(s) if replacement

 Year 1 Year 2 Year3 Year4 Cost of asset is = 50,000 + 20
Net of revenue and expense 40,000 40,000 40,000 40,000
Less Depreciation 23,331 31,115 10,367 5,187
16,669 8,885 29,633 34,813

Basket Wonders (BW) is conside

shipping and installation and f
increase by $110,000 for each of
project ends. Operati
 Cost of asset is = 50,000 + 20,000 = 70,000

Example of an Asset Expansion Project

et Wonders (BW) is considering the purchase of a new basket weaving machine. The machine will cost $50,000 plus $20,000 f
pping and installation and falls under the 3-year MACRS class. NWC will rise by $5,000. Lisa Miller forecasts that revenues wi
ase by $110,000 for each of the next 4 years and will then be sold (scrapped) for $10,000 at the end of the fourth year, when
project ends. Operating costs will rise by $70,000 for each of the next four years. BW is in the 40% tax bracket.

Year1 33.33
Year2 44.45
Year3 14.81
Year4 7.41
on Project

cost $50,000 plus $20,000 for

forecasts that revenues will
d of the fourth year, when the
he 40% tax bracket.