Engineering Economic Analysis

Notice in this example several aspects of the MACRS depreciation method: (1) the sum of

the rt values is 100.00%, (2) this 7-year MACRS GDS property is depreciated over 8 years

(-- property class life + 1), and (3) the book value after 8 years is $0.

Investors in the JMJ Group purchased a hotel resort in April. The group paid $2.0 million for

the hotel resort and $500,000 for the grounds surrounding the resort. The group sold the resort

5 years later in August. Calculate the depreciation deductions for Years 1 through 6. What was

the book value at the time the resort was sold.

Hotels are nonresidential real property and are depreciated over a 39-year life. Table 11-4 lists

the percentages for each year. In this case the cost basis is $2.0 million, and the$500,000paid

for the land is not depreciated. JMJ's depreciation is calculated as fo!1ows:

Year 1 (obtained in April)

Year 2

Year 3

Year 4

Year 5

Year 6 (disposed of in August)

d1= 2,000,000(1.819%)= $36,380

dz = 2,000,000(2.564%) = 51,280

d3= 2,000,000(2.564%) = 51,280

d4= 2,000,000(2.564%) = 51,280

ds= 2,000,000(2.564%) = 51,280

d6= 2,000,000(1.605%) = 32,100

Thus the hotel's book value when it was sold was:

BV6--B- (d1+dz +d3+d4+ds+d6)

.~2,OOO,000:£..::(273,600)~ $1,'726,400

The value of the land has not challged in terms of book value.

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(^1) I
354 DEPRECIATION
Year,t MACRS,Tt Cost Basis dt Cumulativedt B Vt=B-Cum. dt
1 14.29% x $150,000 $ 21,435 $ 21,435 $128,565
2 24.49 150,000 36,735 58,170 91,830
3 17.49 150,000 26,235 84,405 65,595
4 12.49 150,000 18,735 103,140 46,860
5 8.93 150,000 13,395 116,535 33,465
6 8.92 150,000 13,380 129,915 20,085
7 8.93 150,000 13,395 143,310 6,690
8 4.46 150,000 6,690 150,000 0
100.00% $150,000