Engineering Economic Analysis

Modified Accelerated Cost Recovery System (MACRS) 347

FIGURE 1\-4 Decliningbalance

depreciation. $900 .B

Declining Balance

Depreciation Charges

The final salvage value of $70 for Examples 11-2, 11-3, and 11-4 was chosen to match

the ending value for the double-declining balance method. This does not normally happen.

If the final salvage value of Example 11-4 had not been $70, the double declining balance

method wouldhave had to be modified.One modificationstops further depreciationonce the

book value comes to equal the salvage value-this prevents taking too much depreciation.

The other modificationwould switch from declining balance depreciation to straight line-

this ensures taking enough depreciation.

These modifications are not detailed here because (1) MACRS has been the legally

appropriate system since 1986 and (2) as will be shown, MACRS incorporates the shift

from declining balance to straight-line depreciation.

MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)

The modified accelerated cost recovery system (MACRS)depreciation method, introduced

by the Tax Reform Act of 1986,has been continued with the Taxpayer Relief Act of 1997.

Three major advantages of MACRS are that (1) the "property class lives" are less than the

"actual useful lives," (2) salvage values are assumed to be zero, and (3) tables of annual

percentages simplify computations.

The definition of the MACRS classes of depreciable property is based on work by

the U.S. Treasury Department. In 1971 the Treasury published guidelines for about 100

broad asset classes. For each class there was a lower limit, a midpoint, and an upper limit

of useful life, called the asset depreciation range (ADR). The ADR midpoint lives were

somewhat shorter than the actual average useful lives. These guidelines have been incorpo-

rated into MACRS so that the property class lives are again shorter than the ADR midpoint

lives.

Use of MACRS focuses on the general depreciation system (GDS), which is based

on declining balance with switch to straight-line depreciation. The alternative depre-

ciation system (ADS) provides for a longer period of recovery and uses straight-line

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