Engineering Economic Analysis

*The useful life is 39 years for nonresidential real property. Depreciation is straight line using the

midmonth convention. Thus a property placed in service in January would be allowed 11'l2 months

depreciation for recovery Year 1.

1. Salvage values are assumed to be zero for all assets.


2. The first and last years of the recovery period are each assumed to behalf-year.


3. The declining balance rate is 200% for 3-,5-, 7-, and 1O-yearproperty and 150%
   for 15- and 20-year property.

As shown in Example 11-5, the MACRS percentage rates can be derived from these

rules and the declining balance and straight-line methods. However, it is obviously much

easier to simply use thertvalues from Tables 11-3 and 11-4.

Consider a 5-year MACRSproperty asset with an installed and "made ready for use" cost basis of

$100. Developthe MACRSpercentage rates(rt)for the asset based on the underlyingdepreciation

methods.

SOLUTION

To develop the 5-year MACRS property percentage rates, we use the 200% declining balance

method, switching over to straight line at the optimal point. Since the assumed salvage value is

zero, the entire cost basis of $100 is depreciated. Also the $100 basis mimics the 100% that is

used in Table 11-3.

Let's explain the accompanying table year by year. In Year 1 the basis is $100 - 0, aQdthe

dtvalues are halved for the initial half-year assumption. Double declining balance has the larger

value, so it is chosen. SinceN= 5, the rest of the decliningbalancecomputationsare simply

200%/5 times the basis minus the cumulative depreciation.

In Year2 there are 4.5 years remainingfor straight line, so 4.5 is the denominator for dividing

the remaining $80 in book value. Similarly in Year 3 there are 3.5 years remaining. In Year"4,. -:' ~ ." _ _ ',- ,-.,.- - ~_. ,r;

the two calculations happen to be identical, so the switc"hfrom DDB to SL can be dOllein either

Year 4 or Year 5. Once we know that the SL depreciation is 11.52 at the switch point, then the

smly furt!ler cal,cuiatioll is to halve that for the lastJetg". liE'" "'''' ~

-- - - - ..- -- ...-----

352 DEPRECIATION

TABLE11-4 MACRS Depreciation for Real Property (real estate)*

Recovery Percentages for Nonresidential

Recovery

Real Property (month placed in service)

Year (^123456789101112)
1 2.461 2.247 2.033 1.819 1.605 1.391 1.177 0.963 0.749 0.535 0.321 0.107
2-39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2:564 2.564' 2.564
(^40) 0.107 0.321 0.535 0.749 0.963 1.177 1.391 1.605 1.819 2.033 2.247 2.461