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Depreciation

Depreciation. Construction Engineering 221 Economic Analysis. Depreciation. Depreciation is an artificial (non-cash) accounting entry intended to capture the consumption of a capital asset over its economic life

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Depreciation

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  1. Depreciation Construction Engineering 221 Economic Analysis

  2. Depreciation • Depreciation is an artificial (non-cash) accounting entry intended to capture the consumption of a capital asset over its economic life • Depreciation increases after tax profit, so firms desire to depreciate assets as fast as possible (depreciation schedule has major tax implications)

  3. Depreciation • Depreciation basis is that part of the asset’s purchase price that is spread over the depreciation period (service life). • Depreciation basis is cost minus expected salvage value at the end of the service period • IRS regulations spell out the types of depreciation schedules and bases for most business assets.

  4. Depreciation • Depreciation methods • Straight line D = C-S/n • Constant percentage (same as straight line except a percentage is used- may be better for hours on an turbine, for example) • Double declining balance • D1 = 2C/n, Dj = 2(C-sum Dm, 1,j-1)/n • Sum-of the-years’ digits (SOYD) • T=1/2*n*(n+1); Dj = (c-s)(n-j+1)/T

  5. Depreciation • Statutory depreciation • Accelerated cost recovery schedules (ACRS) and modified accelerated recovery schedules (MACSR) governs all depreciation on business assets put in service after 1980. • Look up the depreciation factors in the tax code and multiply: Dj + C X factor for the service life of the asset

  6. Depreciation • Other methods • Production output (similar to percentage) • Sinking fund method- like a reverse mortgage- initial depreciation is low. Almost never used. • “plus interest” methods- never used. Accounts for the time-value of the money being depreciated.

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