Engineering Economic Analysis

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Modified Accelerated Cost Recovery System (MACRS) 355

Comparing MACRS and Historical Methods

In Examples 11-2 through 11-4 we used thestraight-line, sum-of-the-years'-digits,and

declining balancedepreciation methods to illustrate how the book value of an asset that

cost $900 and had a salvage value of $70 changed over its 5-year depreciationlife. Fig-

ures 11-2through 11-4provided a graphical view of book valueoverthe 5-yeardepreciation

period using these methods.Example 11-8compares the MACRSODS depreciationmethod

directly against the historical methods.

Consider the furniture that was purchased in Example 11-6. Calculate the asset's depreciation

deductions and book values over its depreciable life for MACRS and the historical methods.

SOLUTION

Table 11-5 and Figure 11-5compare MACRSand historical depreciationmethods.MACRSdepre-

ciation is the mostacceleratedor fastest depreciation method-remember its nameis the modified

acceleratedcost recovery system. The book value drops fastest and furthest with MACRS, thus

the present worth is the largest for the MACRS depreciation deductions.

Depreciation deductionsbenefita firm after taxes because they reduce taxable income and

taxes. The time value of money ensures that it is better to take these deductions as soon as possible.

In general, MACRS, which allocates larger deductions earlier in the depreciation life, provides

more economic benefits than historical methods.

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TABLE11-5 Comparison of MACRSand Historical Methods for Asset I

in Example "-6 I

Double Sum-of- Years' '"

MACRS Straight line Declining Digits

Year,

dt BYt dt BYt dt BVt dt BYt

(^1) 21,435 128,565 12,000 138,000 30,000 120,000 21,818 128,182
(^2) 36,735 91,830 12,000 126,000 24,000 96,000 19,636 108,545
(^3) 26,235 65,595 12,000 114,000 19,200 76,800 17,455 91,091 I
(^4) 18,735 46,860 12,000 102,000 15,360 61,440 15,273 75,818 I
(^5) 13,395 33,465 12,000 90,000 12,288 49,152 13,091 62,727 l
(^6) 13,380 20,085 12,000 78,000 9,830 39,322 10,909 51,818
(^7) 13,395 6,690 12,000 66,000 7,864 31,457 8,727 43,091 III
(^8) 6,690 (^0) 12,000 54,000 1,457 30,000 6,545 36,545
(^900) 12,000 42,000 (^0) 30,000 4,364 32,182
(^1000) =1000 ",30p =: ;;;:;; <1 = o:3q,gOp = ii:;;;'" 4" 182 30,OOO
I :ili
PW $108,217 $73,734 $89,918 $84,118
(10% ). .---..
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