Engineering Economic Analysis

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350 DEPRECIATION

TABLE11-2 MACRSCDS Property Classes

Property Class Personal Property (all property except real estate)

3-year property Special handling devices for food and beverage manufacture

Special tools for the manufacture of finished plastic products, fabricated metal

products, and motor vehicles

Property with ADR class life of 4 years or less

5-year property Automobiles* and trucks

Aircraft (of non-air-transport companies)

Equipment used in research and experimentation

Computers

Petroleum drilling equipment

Property with ADR class life of more than 4 years and less than 10 years

7-year property All other property not assigned to another class

Office furniture, fixtures, and equipment

Property with ADR class life of 10 years or more and less than 16 ye3!s

10-year property Assets used in petroleum refining and certain food products

Vessels and water transportation equipment

Property with ADR class life of 16 years or more and less than 20 years

IS-year property Telephone distribution plants

Municipal sewage treatment plants

Property with ADR class life of 20 years or more and less than 25 years

20-yearproperty Municipal sewers

Property with ADR class life of 25 years or more

Property Class Real Property (real estate)

27.5 years Residential rental property (does not include hotels and motels)

39 years Nonresidential real property

*The depreciation deduction for automobiles is limited to $7660 (maximum) the first tax year, $4900

the second year, $2950 the third year, and $1775 per year in subsequent years.

Source:U.S. Department of the Treasury, Internal Revenue Service Publication 946,How to Depre-

ciate Property.Washington, DC: U.S. Government Printing Office..

Notice in Table 11-3 that the depreciation percentages continue forone year beyond

the property class life. For example, a MACRS lO-year property has anrtvalue of 3.28% in

Year 11. This is due to thehalf-year convention that also halves the percentage for the first

year. The half-year convention assumes that all assets are placed in service at the midpoint

of the first year..

Another characteristic of the MACRS percentage tables is that thertvalues in any

column sum to 100%. This means that assets depreciated using MACRS arefully depre-

ciated at the end of the recovery period. This assumes a salvage value of zero. This is