Bristol-Myers-Squibb purchased a tablet-forming machine in 2010 for $750,000. The company planned to use the machine for 10 years and then sell it for $50,000; however, due to rapid obsolescence, it will be retired after only 6 years in 2016.
(a) Determine the capital investment remaining when the asset was prematurely retired.
(b) If the asset is sold at the end of 6 years for $175,000, determine the capital investment loss based on straight line depreciation.
(c) If the new-technology machine has an estimated cost of $260,000, how many more years would the company have had to depreciate the currently-owned machine to make its book value and the first cost of the new machine equal each other?
(a) D = (750,000 – 50,000)/10 = $70,000
BV6 = capital investment remaining
= 750,000 - 6(70,000)
= $330,000
(b) Loss = BV6 - selling price
= 330,000 – 175,000
= $155,000
(c) With depreciation charge of $70,000 per year, determine when BV = $260,000
BV7 = 750,000 - 7(70,000) = $260,000
Should have depreciated the machine only one more year.
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