A manufacturing shop in Langley, BC, has a small CNC machine now in use. They purchased...

 

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A manufacturing shop in Langley, BC, has a small CNC machine now in use. They purchased the machine three years ago at a cost of $6200. It now has an undepreciated capital cost of $2200. It can be sold for $2700, but could be used for three more years, at the end of which time it would have no salvage value. The annual O&M costs amount to $11,000 for the old CNC. A new CNC machine can be purchased at $13,000 to replace the present equipment. Freight-in will amount to $1700, and the installation cost will be $800. The new machine has an expected service life of five years and will have no salvage value at the end of that time. With the new machine, the expected direct cash savings amount to $9500 in the first year and $8100 for each of the next two years. The present machine has been depreciated at a declining balance CCA rate of 30% and the proposed (new) machine would be depreciated at the same rate. a) If the old CNC machine is to be sold now, what would be the amount of its equivalent economic depreciation? [2 pts] b) Calculate the first cost (cost base) of the new machine for depreciation purposes? [2 pts] c) If the old CNC machine is to be sold now, what would be the disposal tax effect? [5 pts] d) If the old CNC machine can be sold for $5,500 now instead of $2,700, what would be the disposal tax? [7 pts] The following questions relate to book depreciation: e) If the old CNC machine had been depreciated using 225 % DB and then switching to SL depreciation, calculate the current book value? [7 pts] f) If the CNC machine were not replaced by the new one, when would be the time to switch from DB to SL? [7 pts] Note: Corporate income taxes are at an annual rate of 40%. Also note that the 50% rule applies here. A manufacturing shop in Langley, BC, has a small CNC machine now in use. They purchased the machine three years ago at a cost of $6200. It now has an undepreciated capital cost of $2200. It can be sold for $2700, but could be used for three more years, at the end of which time it would have no salvage value. The annual O&M costs amount to $11,000 for the old CNC. A new CNC machine can be purchased at $13,000 to replace the present equipment. Freight-in will amount to $1700, and the installation cost will be $800. The new machine has an expected service life of five years and will have no salvage value at the end of that time. With the new machine, the expected direct cash savings amount to $9500 in the first year and $8100 for each of the next two years. The present machine has been depreciated at a declining balance CCA rate of 30% and the proposed (new) machine would be depreciated at the same rate. a) If the old CNC machine is to be sold now, what would be the amount of its equivalent economic depreciation? [2 pts] b) Calculate the first cost (cost base) of the new machine for depreciation purposes? [2 pts] c) If the old CNC machine is to be sold now, what would be the disposal tax effect? [5 pts] d) If the old CNC machine can be sold for $5,500 now instead of $2,700, what would be the disposal tax? [7 pts] The following questions relate to book depreciation: e) If the old CNC machine had been depreciated using 225 % DB and then switching to SL depreciation, calculate the current book value? [7 pts] f) If the CNC machine were not replaced by the new one, when would be the time to switch from DB to SL? [7 pts] Note: Corporate income taxes are at an annual rate of 40%. Also note that the 50% rule applies here.

Answer rating: 100% (QA)

a If the old CNC machine is sold the amount of undepreciated capital cost is 2200 The equiva... View the full answer