MEH2450 - Home Assignment to be submitted on

th
Saturday (4 May 2024 between 11 and 11.30 am in Heat Power Lab in workshop area)
1. A special purpose machine is to depreciate following the Straight line method. It costs $25000 and is
expected to produce 100,000 units and then to be sold for $5000. Up to the end of the third year it had
produced 60,000 units and during the fourth year it produced 10,000 units. What is the depreciation
deduction for the fourth year and BV at the end of fourth year?
2. A machine was purchased two years ago for Rs. 10,000. Its annual maintenance cost is Rs. 750. Its life is
six years and its salvage value at the end of its life is Rs. 1,000. Now, a company is offering a new machine
at a cost of Rs. 10,000. Its life is four years and its salvage value at the end of its life is Rs. 4,000. The
annual maintenance cost of the new machine is Rs. 500. The company which is supplying the new
machine is willing to take the old machine for Rs. 8,000 if it is replaced by the new machine. Assume an
interest rate of 12%, compounded annually. Is it advisable to replace the old machine?
3. A certain individual firm desires an economic analysis to determine which of the two machines is
attractive in a given interval of time. The minimum attractive rate of return for the firm is 15%. The
following data are to be used in the analysis:

Which machine would you choose? Base your answer on annual equivalent cost.

4. A company is considering replacing 15 workstations which are on a STAR network. These workstations
have a total salvage value of $8500. The existing system could last for another 3 years with a system
update that will cost $4500 immediately. Also, after the update, the current system will have the
following associated data

Year Salvage value($) Operating & Maintenance Costs ($)

1 7000 13000
2 3500 18000
3 1000 23000
The new workstations will cost $8000 each ($8000*15=$120,000 in total), and implementation for all
the computers will cost $1500. The technological life of the new equipment is 5 years and salvage value
decreases from the first cost by 28% per year. Operating costs will be $4000 for each of the first 2 years
(due to warranty issues) and will be $8000, $10000, and $13000 for years 3 through 5 respectively.
Should the company opt for replacement? If so, when? Use MARR of 8% per annum.
5. 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.

6. An asset for drilling was purchased and placed in service by a petroleum production company. Its cost
Basis is Rs 60000 and it has an estimated Market value of Rs 12000 at the end of an estimated useful life
of 14 years. Compute the depreciation amount in the third year and the Book Value at the end of the Fifth
year by using (i) straight line method (ii) SYD Method.