16.07.2022 - 00:04

# An air pollution control device was installed with an expected equipment life of 5 years. The capital investment was $1,550,000. 1) What is the capitol recovery cost of the control device with an interest rate of 7%? 2) If$50,000 salvage value is expect

Question:

An air pollution control device was installed with an expected equipment life of 5 years. The capital investment was $1,550,000. 1) What is the capitol recovery cost of the control device with an interest rate of 7%? 2) If$50,000 salvage value is expected at the end of the equipment life, what is the annual depreciation value according to the straight-line method?

• 1) The capital recovery cost of the control device can be calculated by using the following formula: Capital recovery cost = (Capital investment x Annual interest rate factor) + (Annual operating cost  Depreciation) Annual interest rate factor can be calculated using the following formula: Annual interest rate factor = (Interest rate x (1 + Interest rate)^Equipment life) / ((1 + Interest rate)^Equipment life  1) Substituting the values into the formula, we get: Annual interest rate factor = (0.07 x (1 + 0.07)^5) / ((1 + 0.07)^5  1) = 0.2004 Capital recovery cost = (1,550,000 x 0.2004) + (0  0) = $310,080 Therefore, the capital recovery cost of the control device with an interest rate of 7% is$310,080. 2) The annual depreciation value can be calculated using the straight-line method, which is calculated as follows: Annual depreciation value = (Capital investment  Salvage value) / Equipment life Substituting the values into the formula, we get: Annual depreciation value = (1,550,000  50,000) / 5 = $300,000 Therefore, the annual depreciation value according to the straight-line method is$300,000.
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