Question

Q2. [20 marks] The Department of Engineering is contemplating the purchase of a top-of-the- line PCB drilling machine to be used in its laboratories. The price of the machine is $5,000. The depreciation rate of the machine follows the SL method over its 10 years life. The market value of the machine at the end of its life is estimated to be $S. Annual fees paid by students to use the machine are estimated to be $500. What is the value for that would make this purchase break even (using the PW method) if the Department would sell the machine at EOY 8? (Hint: the market value at EOY 8 is the book value of the machine at the time).

Answer 1

Depreciation amount every year = 5,000 / 10 => $500 per year.

Annual fees paid by student = $500 per year.

Hence at year 8 end breakeven will happen if the department is able to recover its entire cost (depreciation amount). As in this case

Amount of Cost (Depreciation) = Fees paid by student.

Therefore at year 8 end, it should be able to sell its machine at minimum of machine's book value in order to remain break even.

Hence Value of "S" = Book Value at EOY 8 = 5000 - (500*8)

=> 1,000 is the value of "S".

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