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Proformance said:
I buy $17,500 of equipment in 1993. It will soon turn 15 years old. Assume all of this gear is still in use and it has a useful life of 15 years. It costs an average of $235 /year to keep this gear in working condition. Each year this equipment is used it generates and average of $35,000. The average inflation rate during this period is 2%. Other anual operating costs for this gear are $4,250. This gear is stored in a building that qualifies as a home office. The storage space alone represents 10% of the total home. The federal tax rate is 28%, my effective rate 16% and for simplicity you can ignore any state or local tax.
Bob, I had to look over your question a couple time to make sure I'm reading it correctly.
While there are several numbers that you've included, it appears that $235 + $4,250 are operational costs and not reinvestments or upgrades. You do not denote whether the storage space is included within the operating costs or as a separate deduction.
Missing information related to home office use:
Deductible mortgage interest and real estate taxes
Business expenses not related to the use of your home
Expenses allocable to business use of home Maintenance, insurance, and utilities
The actual CPI comparison:
Federal Reserve Bank of Minneapolis - Inflation Calculator
$17,500 in 1993 would cost $21,435.99 in 2001.
$17,500 in 1993 would cost $24,415.22 in 2006.
$17,500 in 1993 would cost $24,887.54 in 2007.
So to focus on what can be answered at this time using the MACRS Depreciation method (Modified Accelerated Cost Recovery System)
Proformance said:
What was the present value of this gear in 2001?
Assuming that all items were put into use Jan 1, 1993
Depending on the macrs amortization used...
179 expense in 1993, 2001 value would have already been depreciated out.
3yr macrs starting in 1993, 2001 value would have already been depreciated out.
5yr macrs starting in 1993, 2001 value would have already been depreciated out.
7yr macrs starting in 1993, 2001 value would have already been depreciated out.
10yr macrs starting in 1993, 2001 value would be $2,868.25.
15yr macrs starting in 1993, 2001 value would be $7,750.75.
20yr macrs starting in 1993, 2001 value would be $9,759.585.
Proformance said:
What will be it's present value in 2008?
Assuming that all items were put into use Jan 1, 1993
Depending on the macrs amortization used...
179 expense in 1993, 2008 value would have already been depreciated out.
3yr macrs starting in 1993, 2008 value would have already been depreciated out.
5yr macrs starting in 1993, 2008 value would have already been depreciated out.
7yr macrs starting in 1993, 2008 value would have already been depreciated out.
10yr macrs starting in 1993, 2008 value would have already been depreciated out.
15yr macrs starting in 1993, 2008 value would be $516.25.
20yr macrs starting in 1993, 2008 value would be $4,294.15.
Keep in mind that "useable life" does not infer the equipment has no resale value. The equipment may retain a certain measure of fair market value that can be sold. Keep in mind that any revenue generated from the resale of fully depreciated assets is considered taxable income.
Proformance said:
What would be the present value (2007) of that same $17,500 had I put it in a 15 year certificate of deposit at 5.25% ?
$35,821.81
Proformance said:
Dude Walker said:
What is the salary being drawn on the $35,000 of revenue per year?
Equipment doesn't earn a salary, Dude.
That is not what I asked. A salary can be drawn against revenue generated by equipment.
Proformance said:
Let's add one more:
An integral part of this gear breaks down in the year 1999. The replacement cost of this
gear is $5800 (assume proportaionality). The cost of repair is $1,800 and the repair is
typically effective for 4 years. Should I fix this or replace it?
That can be subjective. A repair that typically lasts 4 years could fail in 4 hours. Depending on the warranty, if any, that accompanies the repair...one would need to be compare the value of repair vs replacement against any MACRS depreciation left.
My first inclination would to repair the item. UNLESS a tax benefit existed
and/or a replacement option had improved features and a warranty that would exceed the repairs effective life.
Examples:
if a staff member blows an engine in a van at 100,000 miles and the body is in good shape, little to no rust. Solid front end, transmission, brakes... I would most likely replace the engine.
if a staff member blows an engine in a van at 200,000 miles and the body is in fair shape, some rust. Decent front end, transmission, with 20,000 miles on a brake job... I would most likely NOT replace the engine.
Almost there...
