Appendix A 207Example 2
Determine depreciation allowances during each recovery year for a
MACRS 5-year property with a basis of $10,000.
Year 1 deduction: $10,000 * 20.00% = $2,000
Year 2 deduction: $10,000 * 32.00% = $3,200
Year 3 deduction: $10,000 * 19.20% = $1,920
Year 4 deduction: $10,000 * 11.52% = $1,152
Year 5 deduction: $10,000 * 11.52% = $1,152
Year 6 deduction: $10,000 * 5.76% = $576
The sum of the deductions calculated in Example 2 is $10,000,
which means that the asset is “fully depreciated” after six years.
Though not shown here, tables similar to Table A-3 are available for
the 27.5-year and 31.5-year property classes. Their usage is similar to
that outlined above, except that depreciation is calculated monthly
rather than annually.
A.6 TIME VALUE OF MONEY CONCEPTS
A.6.1 Introduction
Most people have an intuitive sense of the time value of money.
Given a choice between $100 today and $100 one year from today, almost
everyone would prefer the $100 today. Why is this the case? Two pri-
mary factors lead to this time preference associated with money; inter-
est and inflation. Interest is the ability to earn a return on money which
is loaned rather than consumed. By taking the $100 today and placing
it in an interest bearing bank account (i.e., loaning it to the bank), one
year from today an amount greater than $100 would be available for
withdrawal. Thus, taking the $100 today and loaning it to earn interest,
generates a sum greater than $100 one year from today and is thus pre-
ferred. The amount in excess of $100 that would be available depends
upon the interest rate being paid by the bank. The next section develops
the mathematics of the relationship between interest rates and the tim-
ing of cash flows.
The second factor which leads to the time preference associated with
money is inflation. Inflation is a complex subject but in general can be