Engineering Economic Analysis

Depreciation and Asset Disposal 357

analyses capital gains are very uncommon because business and production equip-

ment and facilities almost alwayslosevalue overtime. Capitalgains are much more

likely to occur for nondepreciated assets like stocks, bonds, real estate, jewelary,

art, and collectibles.

The relationship between depreciation recapture, loss, and capital gain is illustrated in

Figure 11-6.

$16,000

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$0

$14,000

$10,000 $4000Capital Gain

$5000 Depreciation Recapture

$5000

Cost

Basis

Market Book

Value Value

(c) Capital Gain and Depreciation Recapture

FIGURE 11-6 Recaptured depreciation, loss on sale, and capital gain.

Consider an asset with a cost basis of $10,000 that has been depreciated using the MACRS method~

This asset is a 3-year MACRS property. What is the gain or loss if the asset is disposed of after

5 years of operation for (a) $7000, (b) $0, and (c) a cost of $2000.

::;;

Tq findgainorloss at disposal we compare marketandbook value. Since MACRS depreciates

toa salvage value of 0, and 5 years is greater than the recovery period, the book value equals $0.11:I

I!!I...~iICIi:I ---

L

$12,000 $12,000

$10,000 I$10 000

$10,000 $10,000 '

$8,000 $7000 $8,000

$6,000 - - - - -$5000-1 :ciatiOn $6,000 $5000

$4,000 !;. - - Recapture $4,000

I $3000 Loss

..
$2000
$2,000 $2,000.
$0
Cost Market Book

$0

Cost Market Book

Basis Value Value Basis Value Value

(a) Depreciation Recapture (ordinary gain) (b) Loss