Beirut Arab University

Faculty of Engineering
Department of Industrial Engineering and Management

Engineering Economy-INME221
Worksheet#5- MCQ –Depreciation & Income Taxes

1. An asset with a first cost of $100,000 is classified as a 5-year MACRS

property for tax depreciation purpose. Suppose the estimated Market
value at the end of year 5 is estimated to be $30,000.What is the book
value of the asset at the end of year 3?
 $20,160
 $30,000
 $45,120
 $28,800

2. Your accounting records indicate that an asset in use has a book value
of $8,640. The asset cost $30,000 when it was purchased, and it has
been depreciated under the 5 MACRS method. Based on the
information available, determine how many years the asset has been
in service.

 4 years
 3 years
 5 years
 6 years

3. You purchased a computer system which cost $50,000 5 years ago. At

that time, the system was estimated to have a service life of 5 years
with salvage value of $5,000. These estimates are still good. The
property has been depreciated according to a 5 year MACRS property
class. Now (at the end of year 5 from purchase) you are considering
selling the computer at $10,000. What book value should you use in
determining the taxable gains?

 $11,520
 $5,760
 $10,368
 $8,640

4. Your company is contemplating the purchase of a large stamping

machine. The machine will cost $180,000. With additional
transportation and installation costs of $5,000 and $10,000,
respectively. Its MV at the end of five years is estimated as $40,000.
The machine will fall under a three-year MACRS class life category. The
justifications for this machine will include $40,000 savings per year in
reduced materials and $30,000 savings in labor. The before-tax MARR
is 20% per year, and the effective income tax rate is 40%.
 a- The total before-tax cash flow in year five is most nearly:
 $9,000
 $80,000
 $40,000
 $110,000
 $70,000

b- The taxable income for year three is most nearly:

 $5,010
 $41,120
 $16,450
 $70,000
 $28,880

c- The PW of the after-tax savings from the machine, in labor and

materials only,(neglecting the first cost, depreciation, and the
salvage value) is most nearly (using the after tax MARR)
 $12,000
 $95,000
 $151,000
 $184,000
 $193,000

5. A company purchased an industrial fork-lift for $75,000 in year 0. The

company expects to use it for the next 7 years after which it plans to
sell it for $10,000. The estimated gross income and expenses
excluding depreciation for the first year are given below. The fork-lift
will be depreciated according to a 5-year MACRS.

Determine the average tax rate applicable in the first year of

operation, using the current corporate tax rate schedule.

 17.31%
 15%
 25%
 18.75%

6. A company purchased a drill press priced at $170,000 in year 0. The

company additionally incurred $30,000 for site preparation and labor
to install the machine. The drill press is classified as a 7-year MACRS
class property. The company is considering selling the drill press for
 $70,000 at the end of year 4. Compute the book value at the end of
year 4 that should be used in calculating the taxable gains.

 $74,970
 $62,480
 $63,725
 $53,108

7. Suppose that you placed a commercial building (warehouse) in service

in January 2006. The cost of property is $300,000 which includes
$100,000 value of land. Determine the amount of depreciation that is
allowed during the first year of ownership.

 $5,128
 $7,372
 $7,692
 $4,915

8. Jbeili Machine Shop purchased a computer-controlled vertical drill

press for $100,000. The drill press is classified as a 3-year MACRS
property. Jbeili is planning to use the press for 5 years. Then Jbeili
will sell the press at the end of service life at $20,000. The annual
revenues are estimated to be $110,000. If the estimated net after-tax
cash flow at the end of year 5 is $30,000, what are the estimated
operating and maintenance expenses in year 5? Jbeili’s income tax
rate is 40%.

 $88,333
 $60,000
 $65,000
 $80,000

9. Omar Shipping Company bought a tugboat for $75,000 (year 0) and

expected to use it for 5 years, after which it will be sold for $12,000.
Suppose the company estimates the following revenues and expenses
from the tugboat investment for the first operating year.

If the company pays taxes at the rate of 30% on its taxable income,
what is the net income during the first year?
 $32,700
 $3,400
  $82,400
 $85,200

10. A major transatlantic airline is considering the purchase of a new

passenger aircraft. This aircraft has a capacity of 400 passengers at
an expected value of load factor of 0.95. a fare of $275 one way will
be charged, and the airplane will make an expected 300-one way
crossings per year. The aircraft will cost $25,000,000 each.
Operations and maintenance expenses will be $21,275,000 per year.
The resale value of the aircraft will be $5,000,000.
The airline elects, ADS, with half year convention over a life of 12
years. The aircraft will be sold for $5,000,000 at the end of the 13th
year. The 5,000,000 will be considered ordinary income. The airline is
in the 46% tax bracket. If the airline uses an after-tax, current dollar
rate of 18%, should this aircraft be purchased?

 Buy the aircraft

 Don’t purchase the aircraft

11. A firm must decide between two system designs, S1 and S2, whose
estimated cash flows are shown in the following table. The effective
income tax rate is 40% and MACRS-GDS depreciation is used. Both
designs have a GDS recovery period of five years. If the after-tax
desired return on investment is 10% per year, which design should be
chosen?

        Design
        S1 S2
Capital investment $100,000 $200,000
Useful life 7 6
MV at the end of useful life $30,000 $50,000
Annual revenues less expenses $20,000 $40,000