Handbook of Civil Engineering Calculations

STRAIGHT-LINE DEPRECIATION

WITH TWO RATES

An asset having an initial cost of $30,000 has a life expectancy of 15 years and an esti-

mated salvage value of $5000. What are the depreciation charges under a modified

straight-line method in which 60 percent of the total depreciation is considered to occur

during the first 5 years of the life of the asset?

Calculation Procedure:

1. Proportion the total wearing value of the asset
   Divide the asset's life span into the two specified intervals, and proportion the total wear-
   ing value between them. Thus, W= $30,000 - $5000 = $25,000; N= 15; W 1 = first-period
   wearing value = 0.60($25,000) = $15,000; W 2 = second-period wearing value =
   0.40($25,000) = $10,000.


2. Compute the annual depreciation charge
   For the first 5 years, D = $15,000/5 = $3000. For the next 10 years, D = $10,000/10 =
   $1000.

DEPRECIATION BYACCELERATED COST

RECOVERY SYSTEM

An asset having a first cost of $120,000 is to be depreciated by the Accelerated Cost Re-
covery System (ACRS). This asset is assigned a 5-year cost-recovery period, and the fol-
lowing depreciation factors are to be applied: year 1, 20.0 percent; year 2, 32.0 percent;
year 3, 19.2 percent; years 4 and 5, 11.5 percent; year 6, 5.8 percent. Compute the depre-
ciation charges and the book value of the asset during the cost-recovery period.

Calculation Procedure:

1. Compute the depreciation charges
   The ACRS for allocating depreciation was adopted by the federal government in 1981,
   but it subsequently underwent several modifications. ACRS was designed to allow a firm
   to write off an asset rapidly, the expectation being that industry would thus be encouraged
   to modernize its plants and facilities.
   The salient features of ACRS are as follows: Each asset is assigned a cost-recovery
   period during which depreciation is to be charged, and this period is independent of its es-
   timated longevity; the estimated salvage value is ignored; the depreciation for a given
   year is computed by multiplying the first cost of the asset by a specified depreciation fac-
   tor; the initial depreciation charge occurs in the year the asset is placed in service, and the
   depreciation charge for that year is independent of the specific date at which this place-
   ment occurs. Since many assets are placed in service relatively late in the year, the allow-
   able depreciation charge for the first year is low compared with that for the second year,