Assignment: Complete the following problems: You must show your work and complete both problems to get any credit! 1)    (Chapter 10) Identify which of the following costs are fixed and which are variable: a)     Electricity for machinery in a plant b)    Sales commission c)     Property taxes on a factory building d)    Property taxes on an administrative building e)     Factory fire insurance f)      Regular maintenance on machinery and equipment g)     Wages paid to temporary or seasonal workers h)    Salaries paid to design engineers i)       Heat and air conditioning in a plant j)       Basic raw materials used in production 2)    (Chapter 11) A machine costing $80,000 to buy and $6,000 per year to operate will save mainly labor expenses in packaging over five years. The anticipated salvage value of the machine at the end of five years is $4,000. a)     If a 12% return of investment (rate of return) is desired, what is the minimum required annual savings in labor from this machine? b)    If the service life is four years instead of five, what is the minimum required annual savings in labor for the firm to realize a 12% return on investment? c)     If the annual operating cost increases 10%, say from $6,000 to $6,600, what will happen to the answer in (a)? Formatting: Text Size: All of the text in this assignment needs to be set in 10 or 12-point size. Please resist the temptation to mix and match point sizes. If you doubt your applications intentions, just select all of your text and insure that it is in 10 or 12-point size. Margins: The right and left side can be set for ½” (0.5) margins. Set the top and bottom margins to one (1”). The only text that ends up on the outside of the one-inch margin is the page number. Name Block: Place the name block in the upper left corner of the page. In MS Excel, use the left side cells. In this class the name block only needs to be on the first page. Put your name first, then the class title and then the date. Example: Park 9 Accounting for Depreciation Depreciation Depreciation is the loss of value of fixed assets over time. Depreciation accounting is to account for the cost of fixed assets in a pattern that matches their decline in value over time. The process of depreciating an asset requires that we know some things: What is the cost of the asset? What is the depreciable life of the asset? What is the asset’s value at the end of its useful life? What method of depreciation do we choose? Depreciable Property A depreciable asset is property for which a firm may take depreciation deductions against income. U.S tax law requires the depreciable property must: Be used in business or held for the production of income Have a definite service life, which must be longer than 1 year Be something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes Depreciable Property Depreciable property includes buildings, machinery, equipment, vehicles, a ...

1. Assignment:
Complete the following problems: You must show your work
and complete both problems to get any credit!
1) (Chapter 10) Identify which of the following costs are
fixed and which are variable:
a) Electricity for machinery in a plant
b) Sales commission
c) Property taxes on a factory building
d) Property taxes on an administrative building
e) Factory fire insurance
f) Regular maintenance on machinery and equipment
g) Wages paid to temporary or seasonal workers
h) Salaries paid to design engineers
i) Heat and air conditioning in a plant
j) Basic raw materials used in production
2) (Chapter 11) A machine costing $80,000 to buy and $6,000
per year to operate will save mainly labor expenses in
packaging over five years. The anticipated salvage value of the
machine at the end of five years is $4,000.
a) If a 12% return of investment (rate of return) is desired,
what is the minimum required annual savings in labor from this
machine?
b) If the service life is four years instead of five, what is the
minimum required annual savings in labor for the firm to realize
a 12% return on investment?
c) If the annual operating cost increases 10%, say from
$6,000 to $6,600, what will happen to the answer in (a)?

2. Formatting:
Text Size: All of the text in this assignment needs to be set in
10 or 12-point size. Please resist the temptation to mix and
match point sizes. If you doubt your applications intentions,
just select all of your text and insure that it is in 10 or 12-point
size.
Margins: The right and left side can be set for ½” (0.5) margins.
Set the top and bottom margins to one (1”). The only text that
ends up on the outside of the one-inch margin is the page
number.
Name Block: Place the name block in the upper left corner of
the page. In MS Excel, use the left side cells. In this class the
name block only needs to be on the first page. Put your name
first, then the class title and then the date. Example:
Park 9
Accounting for Depreciation
Depreciation
Depreciation is the loss of value of fixed assets over time.
Depreciation accounting is to account for the cost of fixed
assets in a pattern that matches their decline in value over time.
The process of depreciating an asset requires that we know
some things:

3. What is the cost of the asset?
What is the depreciable life of the asset?
What is the asset’s value at the end of its useful life?
What method of depreciation do we choose?
Depreciable Property
A depreciable asset is property for which a firm may take
depreciation deductions against income.
U.S tax law requires the depreciable property must:
Be used in business or held for the production of income
Have a definite service life, which must be longer than 1 year
Be something that wears out, decays, gets used up, becomes
obsolete, or loses value from natural causes
Depreciable Property
Depreciable property includes buildings, machinery, equipment,
vehicles, and some intangible properties
Inventories are not depreciable property because they are held
primarily for sale to customers in ordinary course of business.
If an asset has no definite service life, it cannot be depreciated.
Land can never be depreciated, but any land improvements have
a limited useful life, so they are subject to depreciation
Cost Basis
The cost basis represents the total cost that is claimed as an
expense over the asset’s life
Total cost, rather than the cost of the asset only, must be the

4. basis for depreciation charged as an expense over an asset’s
life.
Useful Life and Salvage Value
Asset depreciation ranges (ADRs) are guidelines that specify a
range of lives for classes of assets, based on historical data,
allowing taxpayers to choose a depreciable life of a given asset.
Salvage value is the estimated value of an asset at the end of its
useful life; the amount eventually recovered through sale, trade-
in, or salvage.
Book Depreciation
Book depreciation is depreciation calculated for financial
reports, such as a balance sheets or income statements.
It enables firms to report depreciation to stockholders, where
actual loss in the value of the asset is reflected.
Book Depreciation Methods
Three different methods can be used to calculate the periodic
depreciation allowances for financial reporting:
Straight-line (SL) method
Declining-balance (DB) method
Unit-of-production method

5. Straight-Line Method (SL)
The straight-line method of depreciation interprets a fixed asset
as an asset that provides its service in a uniform fashion.
Depreciation rate is 1/N, where N is the depreciable life.
Dn = (1/N) * (I – S)
Excel: =SLN(cost, salvage, life)
Declining-Balance Method (DB)
The declining-balance method recognizes that the stream of
services provided by a fixed asset may decrease over the asset’s
service life
α = (1/N) (multiplier)
Dn = α * (Bn of previous year)
Most common multipliers used in the U.S. are 1.5 (called 150%
DB) and 2.0 (called 200% DDB, or double-declining-balance)
Park 5
Present Worth Analysis

6. Loan Versus Project Cash Flows
An investment made in a fixed asset is similar to an investment
made by a bank when it lends money.
The essential characteristic of both transactions is that funds are
committed today in the expectation of their earning a return in
the future.
Loan cash flow: the future return is interest plus repayment of
the principle.
Project cash flow: the future return is earnings along with
capital expenditures and annual expenses.
Payback Screening
Determines how long it takes for a company to recover the
investment in a project.
The expected cash flows for each year are added until the sum
is equal to or greater than zero. Once greater than zero, the
project generates profit.
This calculation can be done by either ignoring or considering
time value of money (conventional-payback and discounted-
payback method)
A project does not merit consideration unless its payback period
is shorter than some specified period of time.
Present-Worth Analysis
Present-Worth analysis take into account the time value of
money to help improve project evaluations.
Most convenient time to calculate equivalent values is at time
zero (present).
NPW (net present worth) is the difference between the present
worth of all cash inflows and the present worth of all cash

7. outflows.
Present-Worth Criterion
Step 1: Determine the interest rate that the firm wishes to earn
on its investment (MARR, minimum attractive rate of return)
Step 2: Estimate service life of project.
Step 3: Estimate cash inflow for each period over the service
life.
Step 4: Estimate cash outflow for each period over the service
life.
Present-Worth Criterion
Step 5: Determine the net cash flows for each period (Cash
inflow-cash outflow)
Step 6: Find the present worth of each net cash flow at the
MARR and add them to determine the project’s NPW.
Step 7: If:
PW(i) > 0, accept the investment
PW(i) = 0, remain indifferent
PW(i) < 0, reject the investment
Capitalized-Equivalent Method
The capitalized cost represents the amount of money that must
be invested today in order to yield a certain return A at the end
of each and every period, forever, assuming an interest rate of i.
PW(i) = A/i (A = iPW(i))

8. If withdrawals were higher than A, you would be eating into the
principle, which would eventually reduce it to zero.
Comparing Alternatives
Doing nothing: Is the alternative worth pursuing?
Service projects: Which alternative has the least input or cost?
Revenue projects: Which alternative has the largest net gains
(output-input)?