100 PART 1 Introduction to Managerial Finance
TABLE 3.2 Rounded Depreciation
Percentages by Recovery Year
Using MACRS for First Four
Property ClassesPercentage by recovery yeara
Recovery year 3 years 5 years 7 years 10 years1 33% 20% 14% 10%
245322518
315191814
4 7 12 12 12
51299
6598
797
846
96
10 6(^11) (^4)
Totals 1
0
0
%1
0
0
%1
0
0
%1
0
0
%
aThese percentages have been rounded to the nearest whole percent to sim-
plify calculations while retaining realism. To calculate the actualdeprecia-
tion for tax purposes, be sure to apply the actual unrounded percentages or
directly apply double-declining balance (200%) depreciation using the half-
year convention.
EXAMPLE Baker Corporation acquired, for an installed cost of $40,000, a machine having a
recovery period of 5 years. Using the applicable percentages from Table 3.2,
Baker calculates the depreciation in each year as follows:
Column 3 shows that the full cost of the asset is written off over 6 recovery years.
Because financial managers focus primarily on cash flows, only tax deprecia-
tion methods will be utilized throughout this textbook.
Percentages Depreciation
Cost (from Table 3.2) [(1)(2)]
Year (1) (2) (3)
1 $40,000 20% $ 8,000
2 40,000 32 12,800
3 40,000 19 7,600
4 40,000 12 4,800
5 40,000 12 4,800
6 40,000 (^5) (^2) , (^0) (^0) (^0)
Totals 1
0
0
%$
4
0
,
0
0
0