Lec%2029_Full - IE 343 Engineering Economics Lecture 29:...

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IE 343 Engineering Economics Lecture 29: Chapter 7 - Depreciation and Income Taxes Instructor: Tian Ni Nov.4, 2011 IE 343 Fall 2011 1
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Depreciation Personal Approach Method Property Class GDS 3-, 5-, 7-, 200% DB method with switch 10-year to SL when deduction greater GDS 10- & 20-year 150% DB method with switch to SL when deduction greater GDS Nonresidential & SL over fixed GDS recovery Residential Rental periods Property ADS personal & SL method over fixed ADS real property recovery periods Calculating Depreciation Under MACRS 2 IE 343 Fall 2011
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MACRS uses a half-year time convention : All assets placed in service during the year are treated as if use began in the middle of the year, and 1/2 year of depreciation is allowed. If the asset is disposed of before the full recovery is used, then only half of the normal depreciation deduction can be taken for that year. IE 343 Fall 2011 Modified Accelerated Cost Recovery System 3
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IE 343 Fall 2011 Table 7-3 on Textbook By 200%DB with switchover to SL 4
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IE 343 Fall 2011 Table 7-3 on Textbook By 150%DB with switchover to SL 5
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3-year to 10-year recovery rates are determined by applying the 200% DB method (with switchover to the SL method) to the recovery period with the half- year convention applied to the first and last years . Rates for each period much sum to 1.0000 15-year and 20-year rates are determined with the 150% DB method instead of the 200% DB method (with switchover to the SL method) and are round off to four decimal places . IE 343 Fall 2011 Table 7-3 GDS Recovery Rates 6
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Take 7-year Recovery Rates Calculation as Example Due to the half-year convention applied to 1 st year: Year 1 DB = 1* 0.2857/ 2 = 0.1429 Year 1 SL = 1/ 7/ 2 = 0.0714 So Year 1 Depreciation Factor = Max(Year 1 DB, Year 1 SL) = Max(0.1429, 0.0714) = 0.1429 IE 343 Fall 2011 Table 7-3 GDS Recovery Rates - Calculation Recovery Periods N = 7 R = 0.2857 7
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Due to the half-year convention applied to 1 st year: Year 2 DB = (1-0.1429)(0.2857) = 0.2449 Year 2 SL = (1-0.1429) / (6+ 1/2 ) = 0.1319 Note: 1/2 is the compensation for year 1. Because the half-year convention applied to 1 st year, the other half year should be added into the calculation. So Year 2 Depreciation Factor = Max(Year 2 DB, Year 2 SL) = 0.2449 IE 343 Fall 2011 Table 7-3 GDS Recovery Rates - Calculation 8
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Table 7-3 GDS Recovery Rates - Calculation Year k BV DB SL Depreciation Amount d* k 0 1.0000 1 0.8571 0.1429 0.0714 0.1429 0.1429 2 0.6122 0.2449 0.1319 0.2449 0.3878 3 0.4373 0.1749 0.1113 0.1749 0.5627 4 0.3124 0.1249 0.0972 0.1249 0.6876 5 0.2231 0.0892 0.0892 0.0892 0.7769 6 0.1339 0.0637 0.0892 0.0892 0.8661 7 0.0446 0.0382 0.0892 0.0892 0.9554 8 0.0446 1.0000 Total Depreciation Amount = 1.0000 Please refer to Excel-Chapter7.xls “Table 7.3” for calculation! 9
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This note was uploaded on 01/28/2012 for the course IE 343 taught by Professor Vincent,g during the Winter '08 term at Purdue University.

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Lec%2029_Full - IE 343 Engineering Economics Lecture 29:...

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