Optimizing Depreciation: SYD Method vs Straight-Line Method for

School: Lansing Community College - Course: HOSPITALIT 201 - Subject: Accounting

Problem H-1 HB302 The Green Pine Hotel has always depreciated its fixed assets using the straight-line method for both book and tax purposes. L.M. Branch, a newly hired tax consultant, has suggested this results in excessive taxes and has recommended the SYD method be used for future equipment purposes. Planned equipment purchases for 20X2 and other relevant information are as follows: Cost of Equipment:-------------------------------------$500,000 Assumed purchase date: --------------------------------11/01/X2 Salvage value:------------------------------------------------------0 Useful life:--------------------------------------------- fouryears Marginal tax rate: ------------------------------------------- 30% Investment interest rate: ---------------------------------- 10% Assume: All "tax savings" for one year are invested at the beginning of the following year. Required: As a newly hired intern, you have been requested to prepare a schedule proving the wisdom of LM's advice.

Please fill in the blanks below. Depreciation YearSYDSLDifferenceMarginal TaxRate (30%)Tax SavingsEarnings Net/TaxBalance 11)$200,000 125,00075,0000.32)$22,500$03)22,500 24)$150,000 125,00025,0000.37,5005)1,57531,575 3$100,000125,0006)-25,000 0.3-7,5002,210.2526,285.25 47)$50,000 125,000-75,0000.3-22,5001,839.978)20,995.5 Total Earnings Net: 9).4,625.22