Engineering Economic Analysis

364 DEPRECIATION

FIGURE 11-7 Using VDB to calculate MACRS depreciation.

Summary

Depreciation is the foundation for including income taxes in economic analysis. There are

three distinct definitions of depreciation:

1. Decline in asset's market value.


2. Decline in asset's value to its owner.
   3.Allocating the asset's costlessits salvage valueoverits recovery period or depre-
   ciable life.

While the first two definitions are used in everyday discussions, it is the third, or

accountant's, definition that is used in tax computations and in this chapter. Book value is

the remaining unallocated cost of an asset, or

Book value=Asset cost - Depreciation charges made to date

This chapter describes how depreciable assets arewritten off(or claimed as a business

expense) over a period of years instead ofexpensedin a single period (like wages, material

costs, etc.). The depreciation methods described include the historical pre-1981 methods:

straight line, sum of the years' digits,anddeclining balance.These methods required

estimatingtheasset'ssalvagevalueanddepreciablelife..

The current tax law specifies use of the modified accelerated capital recovery system

(MACRS).This chapter has focused on the general depreciation system (GDS) with limited

discussion of the less attractive alternative depreciation system (ADS). MACRS (GDS)

specifiesfasterrecoveryperiodsand a salvage value of zero, so it is generally economically

more attractive than the historical methods.

, A B C D E F G

(^1) 150,000 First Cost
(^20) Salvage
3 7 Life
4 200% Factor
5
6 Period Depreciation
(^71) $21,428.57 = VDB($A$1,0,$A$3,MAX(0,A7-1.5),MIN($A$3,A7 -O.5),$A$4)
(^82) $36,734.69 or (cost, salvage,life, max(O,(-1.5), min (life, (- .5), factor)
(^93) $26,239.07 j
(^104) $18,742.19 II
(^115) $13,387.28
(^126) $13,387.28
13 7 $13,387.28
(^148) $6,693.64
(^15) $150,000 = Sum