Engineering Economic Analysis

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358 DEPRECIATION

(a) Recaptured depreciation = $7000, since the book value is $7000 higher.

(b) Since market value equals salvage value, there is no recaptured depreciation or loss.

(c) Since the money is paid for disposal, this is less than the book value, and there is a loss.

This generalmethodfor calculatingrecaptureddepreciationor loss applies to all of the depreciation

methods described in this chapter.

If the asset is in the middle of its depreciable life, then recaptured depreciation and

losses are calculated in a similar manner--compare themarketandbook valuesat the time

of disposal. However,in computingthe book value with MACRSdepreciationa specialrule

must be applied for assets disposed of before the end of the recovery period. The rule is to

take one half of the allowable depreciation deductionfor that year.This rule assumes th&t

disposals take place on average halfway through the year. Thus for a 5-year asset disposed

of in the middle of Year 4, the rate allowed for MACRS depreciation is half of 11.52%or

5.76%. If the asset is disposed of in Year6, it is already past the recovery period, and a half-

year assumptionhas already been built into the MACRS schedule.Thus, the fullr6is taken.

Example 11-10illustrates several cases of disposal before the asset is fully depreciated.

Consider the $10,000 asset in Example 11-9. Do the following:

1. Calculate the effect of disposal if this asset is sold during Year 2 for $2500.


2. Calculate the effect of disposal if the asset is sold during Year 3 for $2500.


3. Calculate the effect of disposal if the asset is sold after Year 3 for $4000 if straight-line
   depreciation is used over the asset's 5-year life, and a salvage value of $5000 is assumed.

SOLUTION

1. Marketvalu~=$2500

Bookvaluez= 10,000- 1O,009[rl+rzl2]=10,000- 10,000[0.3333+ 0.4445/2]

=$4444.5

Loss=$1944.5 (= 4444.5 - 2500) (Loss, since BV greater than MV)

(Note:If the full rather than half deduction were taken in Year 2, then the book value

would be $2222.50 less and the loss would become a gain of $278. Since depreciation

would increase by that $2222.50, the total of (depreciation) + (loss or gain) would be

$4167 in either calculation.)

2. Market value3=$2500

BoolC'value~~, 10,000 10,000[rp.-/-:=rz*'r3/2]

= 10,000 -10,000[0.3333 + 0.4445 + 0.1481/2]=$1481.50

Recapturea[fepi'eaatimf 2500~ 1481.50;-1$1018.50 (Recaptured, since.MV > BY)

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