Engineering Economic Analysis

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Modified Accelerated Cost Recovery System (MACRS) 353

Notice,that the DDB calculations get smaller every year, so that at some point the straight-line

calculations lead to faster depreciation. This point is the optimal switch point, and it is built into

Table 11-3 for MACRS.

Year

1 2 3 4 5 6

DDBCalculation

1/2(2/5)(100 - 0) =20.00

(2/5)(100 - 20.00) =32.00

(2/5)(100 - 52.00) = 19.20

(2/5)(100 - 71.20)=11.52

SL Calculation

1/2(100 - 0)/5 =10.00

(100 - 20)/4.5 =17.78

(100 - 52)/3.5 =13.71

(100 - 71.20) /2.5 =11.52

11.52

(112)(11.52)= 5.76

MACRSTt

(%) Rates

20.00 (DDB)

32.00 (DDB)

19.20 (DDB)

11.52 (either)

11.52 (SL)

5.76 (SL)

Cumulative

Depreciation (%).

20.00

52.00

71.20

82.72

94.24

100.00

The values given in this example match thertpercentage rates given in Table 11-3 for a 5-year

MACRS property.

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MACRS Method Examples

Remember the key questions in using MACRS: (1) What type of asset do you have, and

does it qualify as depreciable property? (2) What amount are you depreciating [cost basis]?

and (3) When are you placing the asset in service? Let's look at several examples of using

MACRS to calculate both depreciation deductions and book values.

Use the MACRS GDS method to calculate the yearly depreciation allowances and book values

for a firm that has purchased $150,000 worth of office equipment that qualifies as depreciable

property. This office furiritureis estimated to have.a salvage (market) value of $30,000 (20% of

the original cost) after the end of its depreciable life.

i.

SqLUTION

1. The assets qualify as depreciable property.


2. The cost basis is given as $150,000.


3. The assets are being placed in service in Year 1 of our analysis.


4. MACRS GDS applies.


5. The salvage value is not used with MACRS to calculate depreciation or book value.
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   Office equipmetItis listed in Table 11-2 as a 7-year property. We now use the MACRS <1bS- - ~ -I
   7-year property percentages from Tab
   .
   le 11-3 and Eq. 11_5to calculate the year-to-year <!erred- I

ation allowances. We use Equation 11-1 to calculate the book value of the asset..

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