1 / 15

MER 439 - Design of Thermal Fluid Systems Engineering Economics Depreciation Methods Professor Anderson Spring Term 2012

MER 439 - Design of Thermal Fluid Systems Engineering Economics Depreciation Methods Professor Anderson Spring Term 2012. Definitions of Depreciation. Definitions : decrease in value, amortized cost, difference in value between an existing old asset, impaired serviceableness

tiara
Download Presentation

MER 439 - Design of Thermal Fluid Systems Engineering Economics Depreciation Methods Professor Anderson Spring Term 2012

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MER 439 - Design of Thermal Fluid Systems Engineering EconomicsDepreciation Methods Professor Anderson Spring Term 2012

  2. Definitions of Depreciation • Definitions: decrease in value, amortized cost, difference in value between an existing old asset, impaired serviceableness • Accounting Definition: Reduction in the value of an asset with time,“Book Depreciation” vs “Tax Depreciation” • Concepts of Value: Market Value vs Value to owner

  3. Depreciation Terminology Depreciation: reduction in the value of an asset using (government) approved rules Dt: depreciation amount B: first cost (installed cost of asset) (Also called the “Unadjusted Basis” or simply “Basis” … hence the “B”) BVt: book value - represents the remaining un-depreciated investment (value) on the books. Determined at the end of the year Note the “t” subscript refers to “time” in years

  4. Depreciation Terminology n: recovery period (depreciable life of asset in years) dt: depreciation rate (fraction of first cost removed by depreciation in a given year). SV: salvage value (estimated market value at the end of an asset’s useful life).

  5. Depreciation Terminology Depreciation is allowed for personal or real property. Methods: (1) Accelerated methods (2) Uniform Methods (3) Decelerated Methods CHOICE IS INFLUENCED BY TAX LAWS

  6. Straight Line Depreciation

  7. SL Depreciation Example Consider a machine tool with a first cost of $35,000 an estimated life of 20 years and an estimated salvage value of $3,500. Use SL depreciation and calculate the depreciation charge and the book value of the machine tool after 4 years.

  8. Declining Balance Depreciation Assets are commonly worth more in initial years – it is sensible to write off costs more rapidly in the early years. Declining Balance: a given depreciation rate (d) is applied to the remaining book value each year. i.e. 10% applied to a $35,000 asset 1st year Dt = 0.01*(35000) = 3500 2nd year Dt = 0.10*(35000-3500) = 3150

  9. Declining Balance Depreciation The maximum allowable percentage is double the straight line rate: (also called Double Declining Balance or DDB method) dmax = 2/n The actual depreciation rate is: dt = d*(1-d)t-1 Dt = d*BVt-1 Dt = d*B*(1-d)t-1 BVt = B*(1-d)t

  10. DB Depreciation Example Assume that an asset has a first cost of $25,000 and an estimated salvage value of $4000 after 12 years, Calculate its depreciation and book value for (a) year one and (b) year four using the DDB method.

  11. MACRS Economic Reform Act (1981) – ACRS Tax Reform Act (1986) - MACRS • Applies to property placed in service after 12/31/86 • Doesn’t use useful life or SV • Property is organized into ASSET Classes and assigned a Class Life.

  12. MACRS Dt = dt*B (dt is set by the government) BVt = BVt-1-Dt The first cost is always completely depreciated – assumes SV = 0

  13. MACRS Rates - Half Year Convention

  14. MACRS Depreciation Example Calculate the depreciation charge and book value for an asset worth $100,000 using MACRS depreciation with a three year recovery period.

  15. MACRS Recovery Period Set by the government…http://www.irs.gov/publications/p946/ch04.html

More Related