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ISE2014_Class21

# 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
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
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
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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