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ISE2014_Class21 - Class 21 DB Methods ISE 2014 Click to...

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Click to edit Master subtitle style Class 21 – DB Methods ISE 2014 Fall 2010
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Depreciation Methods Last class we covered straight line and units of production Today’s class we’ll cover declining balance and declining balance with a straight line switchover Wednesday we’ll cover MACRS and practice our methods with any extra time
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Declining Balance Last class we learned about the linear methods of depreciation Today we’ll learn the non-linear method of declining balance Let’s start off by looking at the equation
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Declining Balance Again let N = useful life of asset and B = cost basis of our asset Next we’ll define a rate of depreciation R R = 2/N (200% or double declining balance) R = 1.5/N (150% declining balance) dk = B(1-R)k-1(R) H depreciation in year k The depreciation in any particular year depends on what year we’re talking about
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Declining Balance d*k = B[1-(1-R)k] ° cumulative depreciation up to and including year k BVk = B(1-R)k ° Book value or remaining value after year k Notice there is no salvage value in these equations DB method does not account for salvage
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DB Example Let’s work a quick example to illustrate what DB method looks like Let’s say we purchase a $100,000 asset with a useful life of 12 years We’ll use double declining balance of R = 2/N for this problem Lets make a complete table to see how DB works
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DB Example
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DB Example If we had done straight line, depreciation would have been $100,000 / 12 = $8,333 each year Notice that with DB method we start off with much higher depreciation and then drop off This is why DB method is called an
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