CHAPTER 12 Solutions Manual

For

Basics of Engineering Economy, 1e

Leland Blank, PhD, PE
Texas A&M University
and
American University of Sharjah, UAE

Anthony Tarquin, PhD, PE

University of Texas at El Paso

PROPRIETARY MATERIAL.
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12- 1

Chapter 12
12.1

(a) BV3 = 100,000 (40,000+24,000+14,000)

= $22,000
(b) Market value today and S = $20,000, while BV3 = $22,000.
(c) d1 = 0.40; d2 = 0.24; d3 = 0.14
Percent written off is the sum = 0.78 or 78%.

12.2

(a) Depreciation = Rate(495,000)

Year
Depr
BV
1
$164,984 $330,016
2
220,028 109,988
3
73,309
36,679
4
36,678
0
(b) BV3 = $36,679 while market value is much higher at $150,000. The rates
reduce the asset to zero salvage, not recognizing the $150,000 salvage.

12.3

(a, b)

Tax depreciation: Dt = Rate(BVt-1)

Book depreciation: Dt = Rate(40,000)
Tax
Year Depr
BV
0
40,000
1
16,000 24,000
2
9,600 14,400
3
5,760 8,640
4
3,456 5,184

Book
Depr
BV
40,000
10,000 30,000
10,000 20,000
10,000 10,000
10,000
0

A spreadsheet solution with graphs follows.

12- 2

12.4

Productive life Time the asset is actually expected to be in service.

Tax recovery period Time allow by tax laws to depreciate the assets value to
salvage (or zero).
Book recovery period Time used on company accounting books for depreciation
to salvage (or zero)

Straight Line (SL) Depreciation

12.5

(a) d = 1/10 = 0.1 or 10%

(b)

S = 0.15(475,000) = $71,250
Dt = (550,000 71,250)/10 = $47,875 per year

12.6

(c)

BV5 = 550,000 5(47,875) = $310,625

(d)

BV10 = 550,000 10(47,875)

= $71,250 = S

Spreadsheet solution uses SL depreciation.

Dt = (350,000 50,000)/5 = $60,000 per year

12- 3

12.7

Book: Dt = (150,000 25,000)/9.5 = $13,158 per year

Tax: Dt = (150,000 0)5 = $ 30,000 per year
Spreadsheet solution uses SL depreciation for book and tax purposes to plot BV.

12.8

Dt = 18,900 = (P 0.25P)/8
0.75P = 8(18,900)
P = $201,600

12.9

DDB: D3 = (2/5)(500,000)(3/5)2
= $72,000
150%DB: d = 1.5(1/5) = 0.3
D3 = (0.3)(500,000)(0.7)2
= $73,500
SL: D3 = (500,000-50,000)/5
= $90,000

12.10 The DDB salvage amount is calculated using d = 0.4.

BV5 = B(1-d)t = 500,000(.6)5
= $38,880
Considerably less than the estimated S = $50,000.
For 150% DB, implied salvage is calculated using d = 0.3.
BV5 = 500,000(.7)5 = $84,035
Considerably more than the estimated S = $50,000.
12.11 Use Equation [12.7] with d = 0.4.
d1 = 0.4(0.6)0 = 0.40
d2 = 0.4(0.6)1 = 0.24
d3 = 0.4(0.6)2 = 0.144
d4 = 0.4(0.6)3 = 0.0864
d5 = 0.4(0.6)4 = 0.05184
12- 4

12.12 Spreadsheet solution determines BV values and plots. Note the DDB depreciation
in year 5 is $14,800, so BV5 = S = $50,000 is maintained.

12.13 The d is the fixed percentage (in decimal form) by which the BV is reduced each
year, while dmax is a specific value of d for DDB, that is, double the SL rate of d =
1/n. Finally, the annual depreciation rate, dt is the fraction of P written off each
year. In DB depreciation, dt and d are not equal, whereas in SL depreciation, they
are equal.
12.14 (a)

DDB: d = 2/12 = 0.1667

BV12 = B(1-d)12 = 180,000(1-0.1667)12
= $20,188
150% DB: d = 1.5(1/12) = 0.125
BV12 = 180,000(1-0.125)12
= $36,255

(b) S = $30,000 is between the two implied salvages.

(c)
12.15 (a)

DDB: writes off more since all $150,000 is depreciated.

150% DB: writes off less since it will stops at BV12 = $36,255
SL: BV10 = $10,000 by definition
DDB: Use Equation [12.9] to determine if the implied S < $10,000
with d = 2/7 = 0.2857
BV10 = BV7 = B(1-d)7 = 100,000(0.7143)7
= $9486
Both salvages are less than the market value of $12,500

12- 5

(b)

SL: D10 = (100,000-12,500)/10 = $8750

DDB: D10 = 0, since n = 7 years
Spreadsheet solution for both parts follows.

12.16 Select any first cost value to use for B. The spreadsheet below uses $10,000.
DDB: d = 2/5 = 0.4
125% DB: d = 1.25/5 = 0.25
DDB accumulates percentage faster and more in total than 125% DB.

12.17 The n = 5 years from Table 12-4, rates are from Table 12-2; salvage is not used.
Dt = rate(1,200,000)

and BVt = BV - BVt-1 - Dt

12- 6

12.18 MACRS is accelerated compared to SL depreciation because more of the first cost
is written off in the early years of the recovery period. SL is the classic nonaccelerated method. Anything that has a BV curve below the SL BV curve is
considered accelerated depreciation.
12.19 (a)

SL: Dt = (320,000-75,000)/7 = $35,000 per year

MACRS: Dt = Rate(320,000)
Straight line
Year Depr
BV
0
320,000
1
35,000 285,000
2
35,000 250,000
3
35,000 215,000
4
35,000 180,000
5
35,000 145,000
6
35,000 110,000
7
35,000 75,000
8
0
75,000

Rate

MACRS
Depr

0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446

45,728
78,368
55,968
39,968
28,576
28,544
28,576
14,272

BV
320,000
274,272
195,904
139,936
99,968
71,392
42,848
14,272
0

Spreadsheet solution with BV plots follow.

(b) MACRS neglects the salvage value; it always depreciates to zero.

12.20 Use the MACRS rates fro n = 5. Depreciation is plotted via spreadsheet below.
12.21

SL Dt = (250,000-50,000)/8 = $25,000 years t = 2 through 8

= 25,000/2 = $12,500
years t = 1 and 9
SL depreciation is plotted via spreadsheet below.
Spreadsheet solution for 12.20 and 12.21 follows.

12- 7

12.22 Percentage of first cost is much larger for MACRS than SL depreciation.
MACRS: (206,800/250,000)100% = 82.7% of first cost
SL: (87,500/250,000)100% = 35.0% of first cost
12.23 (a) MACRS: rate for year 3 is 0.1440; sum of rates for 3 years is 0.4240.
D3 = 0.1440(800,000) = $115,200
BV3 = 800,000 0.4240(800,000) = $460,800
(b) DDB: d = 2/15 = 0.13333
D3 = 0.13333(800,000)(1-0.13333)2 = $80,117
BV3 = 800,000(1-0.1333)3 = $520,776
(c) ADS SL: d = 1/15 = 0.06666 years 2 through 15; that for years 1 and 16.
D3 = 0.06666(800000-150,000) = $43,329
BV3 = 800,000 2.5(43,329) = $691,678
Spreadsheet solution for all parts follows. The relations used to determine
the values (row 50 are indicated first (row 3).

12.24 MACRS:

D1 = 0.01391(3,400,000) = $47,294
D2 to D10 = 0.02564(3,400,000) = $87,176

Total depreciation for 10 years = 47,294 + 9(87,176) = $831,878

BV10 = 3,400,000 831,878 = $2,568,122
Anticipated selling price is 1.5(BV10) = $3,852,183
Fairfield hopes to sell it for $452,183, or 13.3%, more than they paid for it.
12- 8

12.25 (a) MACRS: BVt = 750,000 - Dt for years 1, , t, up to 5 years

SL: BVt = 750,000 t(750,000-150,000)/10 for years 1, , t, up to 10 years
= 750,000 t(60,000)
Book values and curves are detailed in the spreadsheet below.
(b) MACRS: BV = 0 after 5 years; over-depreciated by $100,000.
SL: BV = $150,000 after 10 years; under-depreciated by $50,000.

12.26 Spreadsheet solution uses VDB function in general form for each year t.
= VDB(P,S,n,MAX(0,t-1.5),MIN(n,t-.5))
= VDB(300000,0,5,MAX(0,t-1.5),MIN(5,t-.5))

12.27 (a) DDB is initially applied for MACRS recovery periods n = 3, 5, 7 and 10. To
determine this, calculate 1/n, which is 50% of the DDB rate of 2/n.
(b) 150% DB or DDB rate is applied in year 1 at d of the rate (to accommodate
the half-year convention). Then the switching procedure is applied, with S of 0
or using the estimated value, until SL has a larger depreciation. SL is used until
the end of the recovery period, plus the year n+1 receives SL depreciation of
that taken in year n.

12- 9

(Note: Though it is not obvious from the limited material in this chapter, the SL
rate is determined from Equation [12.15] with the denominator (n-t+1.5). The
extra 0.5 accommodates, again, the half-year convention, which is taken care of
in the year n+1. Missing this subtly should not be graded against a student, as it
is not specifically covered in the textual material.)
12.28 Methods will vary from SL (also called flat rate), to sum-of-years-digits (SYD), to
all the methods learned here. DDB and SL are very common. Also, switching to SL
is allowed in many countries when it is advantageous. Production-based methods
are also commonly used where a rate per x units produced by the asset determine
the annual depreciation.
12.29 Use the switching procedure for DDB-to-S. DDB d = 0.25. Two example
computations for switching follow.
Year 2: DDB depreciation is 0.25(150,000) = $37,500
(selected)
SL depreciation is (150,000-10,000)/7 = $20,000
Year 6: DDB depreciation is 0.25(47,461) = $11,865
SL depreciation is (47,461-10,000)/3 = $12,487
Year
0
1
2
3
4
5
6
7
8

DDB
50,000
37,500
28,125
21,094
15,820
11,865

DDB-to-SL switch
SL
Selected
23,750
20,000
17,083
14,875
13,320
12,487
12,487
12,487

50,000
37,500
28,125
21,094
15,820
12,487
12,487
12,487

BV
200,000
150,000
112,500
84,375
63,281
47,461
34,974
22,487
10,000

(selected)

MACRS
Rate
Depr
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446

28,580
48,980
34,980
24,980
17,860
17,840
17,860
8,920

Compare PW of selected and MACRS depreciation values. MACRS has the

larger present worth; it is preferred.
DDB-to-SL:

MACRS:

PWD = 50,000(P/F,10%,1) + + 12,487(P/F,10%,8)

= $141,089
PWD = 28,580(P/F,10%,1) + + 8,920(P/F,10%,8)
= $144,283

12- 10

Spreadsheet solution applies the VDB function, but the details/understanding of

how the procedure works is lost.

12.30 This problem is best worked using a spreadsheet. Manual solution is relatively
easy, but quite time consuming.
SL: Dt = 900,000/10 = $90,000 per year
MACRS: Rates from n = 7 table
DDB-to-SL switch: Use VDB to switch in year 5 of a 7-year recovery

Switching to SL from DDB (UAE) offers largest PWD value.

12- 11

12.31 Verify the following MACRS rates using the modified DDB-to-SL switching.
t
dt

1
0.20

2
0.32

3
0.192

4
5
0.1152 0.1152

6__
0.0576

The DDB rate to start is d = 2/5 = 0.40.

d1:

DDB: d1 = d = 0.20

d2:

DDB: accumulated d is 0.20. By Equation [12.14]

d2 = 0.4(1 0.2) = 0.32
(selected)
SL: By modified Equation [12.15] with denominator (5-2+1.5),
d2 = 0.8/4.5 = 0.178

d3:

Accumulated D is 0.2 + 0.32 = 0.52

DDB: d3 = 0.4(1 0.52) = 0.192
SL:

d4:

(selected)

d3 = 0.48/(5-3+1.5) = 0.137

Accumulated D is 0.2 + 0.32 + 0.192 = 0.712

DDB: d4 = 0.4(1 0.712) = 0.1152
SL:

d4 = 0.288/2.5 = 0.1152

(select either)

Switch to SL occurs in year 4.

d5:

Use the SL rate n = 5. To confirm, use accumulated D of 0.8272

SL:

d6:

d5 = 0.1728/1.5 = 0.1152

d6 is the remainder or 1/2 the d5 rate. Accumulated D is 0.9424

d6 = d5 /2 = 0.0576
or
d6 = 1 0.9424 = 0.0576

12.32 Depletion applies to natural resources that cannot be replaced or repurchased.

12.33 Percentage depletion is not limited to the first cost, however no more than 50% of
taxable income can be depleted annually. The total cost depletion over the life of
the resource usage cannot total more than the first cost.

12- 12

12.34 Annual percentage depletion is 22% of gross income (GI).

Year
1
2
3
4
Total

Pounds
275,000
250,000
320,000
425,000

Price,
$ per pound
70
69
73
75

GI, $
Depletion, $
19,250,000 4,235,000
17,250,000 3,795,000
23,360,000 5,139,200
31,875,000 7,012,500
20,181,700

Percent depleted: 20,181,700/350,000,000 = 5.77%

12.35 Percentage depletion = pounds(price)(depletion percentage)
= 625,000(78)(0.22)
= $10,725,000
Cost depletion: Determine the remaining investment and the corresponding rate
from Equation [12.18].
Remaining investment = 350,000,000 20,181,700 = $329,818,300
Rate = 329,818,300/4 million = $82.45 per pound
Cost depletion = 625,000(82.45)
= $51,531,250
Cost depletion allows 4.8 times as much rite-off in this year.
12.36 Percentage depletion = 0.20(GI) = 500,000
GI = $2,500,000
GI = (price)number of barrels
2,500,000 = 55(number of barrels)
Barrels = 45,455
Reserves = 45,455/0.01
= 4,545,500 barrels
12.37 Determine the cost depletion factor in $/1000 tons and multiply by yearly
tonnage.
pt = 2,900,000/100 = $29,000 per 1000 tons
Annual cost depletion = volume 29,000

12- 13

Volume, Cost depletion,

Year 1000 tons
$ per year
1
10
290,000
2
12
348,000
3
15
435,000
4
15
435,000
5
18
522,000
Total
70
$2,030,000
12.38 Remaining investment = 35.0 24.8 million = $10.2 million
Cost depletion:

pt = 10.2 million/8000 = $1275 per 100 ton

Allowance = 720(1275)
= $918,000

Percentage depletion: Rate is 10% of GI

GI range is $6,125,000 to 8,500,000
Min allowance = 0.1(6,125,000) = $612,500
Max allowance = 0.1(8,500,000) = $850,000
Problems for Test Review and FE Exam Practice
12.39 BV3 = 100,000 3(80,000/7) = $65,714
Answer is (b)
12.40 SL: d2 = 20%
Answer is (c)

DDB: d2 = 40%(1-40%) = 24%

12.41 Answer is (c)

12.42 DDB d = 2/n = 2/8 = 0.25
Market value = 1.20BV4 = 1.20(P(1-d)4
= 1.2(500,000)(0.75)4
= $189,844
Answer is (d)
12.43 Answer is (a)
12.44 Answer is (b)
12.45 Answer is (d)
12.46 Answer is (a)
12.47 Answer is (b)

12- 14

12.48 Factor = 210,000,000/700,000 = $300 per ounce

Cost depletion = 300(35,000) = $10.5 million
Answer is (c)
12.49 Answer is (d)
12.50 Percentage:

Cost:

GI = 65,000(40) = $2.6 million

Depletion = 0.05(2.6 million)
= $130,000
Factor = $1.28 per ton
Depletion = (65,000(1.28)
= $83,200

Answer is (b)

12- 15