ANSWER SCHEME

ASSIGNMENT 2
KEJ 4501 (Engineering Project management)

Problem 9.3

Total property value with the warehouse:

land building

Original cost $65,000 $55,000

Adjustments to basis

add: new warehouse $50,000

demolition expense $8,000

subtract: building
($55,000)
loss

adjusted cost basis $65,000 $58,000

Total value = $65,000 + $58,000 = $123,000

Note that the old house that was demolished has no value. This loss may be
deductible for tax purpose, but this should not be added to the cost basis of the
new asset. In general, the propertys entire basis is allocated to the land only, if
the company intends to demolish the building when they acquire property for
business use. Then, the cost basis is increased by the net cost of demolition.
(The demolition expense can be treated as a site preparation expense.)

Cost basis for depreciation:

Cost basis = $8,000 + $50,000 = $58,000

Problem 9.5
8.4) Trade-in allowance:

Oldmolding machine (Book value) $18,000

less: trade-in allowance $20,000

Unrecognized gain $2,000

Cost of a new molding machine $155,000

less: unrecognized gain on trade-in

($2,000)
allowance

Cost basis of the new molding machine $153,000

Comments: If the old molding machine is sold on the market (instead of

traded in), there will be no unrecognizable gain. In that situation, the cost
basis for the new molding machine will bejust $155,000.

Problem 9.6

8.5) Trade-in allowance:

Old grinder (Book value) $12,000

less: trade-in allowance $11,000

unrecognized loss ($1,000)

cost of a new grinder $65,000

plus: unrecognized loss on trade-in

$1,000
allowance

cost basis of new grinder $66,000

Comments: If the old grinderis sold on the market (instead of traded in),
there

will be no unrecognized loss. In that situation, the cost basis for the new
grinder

will be just $65,000.

Problem 9.7

Cost basis for flexible manufacturing cells:

flexible manufacturing cells
$1,200,000
(@$400,0003)

freight charges $30,000

handling fee $15,000

site preparation costs $50,000

start up and testing costs $18,000

special wiring and material

$2,000
costs

cost basis $1,315,000

(Note: start-up and testing costs = $15 x 40 x 6 x 5 = $18,000)

Problem 9.10

1.5
Assu min g 150% DB method ,
5
EOY Dn
1 $90, 000 0.3 27, 000
2 63, 000 0.3 18,900
3 4, 4100 0.3 13, 230
4 30,870 0.3 9, 261
5 21, 609 0.3 6, 482.7
6 15,126 0.3 4,537.85
7 10,5888 0.3 3,176.4 588
Total depreciation $80, 000
0.3
Bn
$90, 000 27, 000 63, 000
63, 000 18,900 4, 4100
4, 4100 13, 230 30,870
30,870 9, 261 21, 609
21, 609 6, 482.7 15,126
15,126 4,537.85 10,588
10,588 588 10, 000

Problem 9.14

1
1.75 0.35
5
(a)

D1 (0.35)(25, 000) $8,750

(b)
 B4 (25, 000)(1 0.35) 4 $4, 463.
(c)

Problem 9.15

Given: I = $30,000, N = 5 years, S = $3,000

(a) (b)

DDB SL

n Dn Bn Dn Bn

0 $30,000 $30,000

1 $12,000 $18,000 $5,400 $24,600

2 $7,200 $10,800 $5,400 $19,200

3 $4,320 $6,480 $5,400 $13,800

4 $2,592 $3,888 $5,400 $8,400

5 $888 $3,000 $5,400 $3,000

Problem 9.19

5, 000
D5,000 hrs ($60,000 $8,000)
50, 000
$5, 200

Problem 9.25

$180,000 $5, 000 $185,000

(a) Cost basis:

(b)

Dep.
n Dn Bn
Rate

0 $185,000

1 0.1429 $26,429 $158,571

2 0.2449 $45,306 $113,265

3 0.1749 $32,362 $80,904

 4 0.1249 $23,115 $57,794

5 0.0893 $16,520 $41,274

6 0.0892 $16,521 $24,773

7 0.0893 $16,502 $8,251

8 0.0446 $8,251 $0

Problem 9.27

Given: I = $65,000, S = $8,000, N = 6 years, tax depreciation method

= 7 year MACRS property class

Dep.
n Dn Bn
Rate

0 $65,000

1 0.1429 $9,286 $55,714

2 0.2449 $15,918 $39,796

3 0.1749 $11,370 $28,426

4 0.1249 $8,122 $20,304

5 0.0892 $5,801 $14,503

6 0.0892 $5,801 $8,702

7 0.0892 $5,801 $2,901

8 0.0446 $2,901 $0

Problem 9.30

Given: Residential real property (27.5-year), I = $200,000

Dep.
n Dn Bn
Rate
0 $200,000
1 0.0076 $1,515 $198,485
2 0.0364 $7,273 $191,212
3 0.0364 $7,273 $183,939
4 0.0364 $7,273 $176,667
5 0.0197 $3,939 $172,727
Problem 9.37

8.32) (a) Taxable income:

$2,500,000 - $1,280,000 - $128,000 = $1,092,000

(b) Income tax calculation using the tax formula from Table 8.11:

$113,900 + 0.34($1,092,000 - $335,000) = $371,280