6 IE 492 Engineering Economics BIGGEST MISTAKE IN CALCULATIONS IT IS INCORRECT

6 ie 492 engineering economics biggest mistake in

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6 IE 492 Engineering Economics
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BIGGEST MISTAKE IN CALCULATIONS! IT IS INCORRECT TO CONSIDER SUNK COSTS IN REPLACEMENT / ECONOMIC LIFE CALCULATIONS! DO NOT CONSIDER SUNK COSTS IN REPLACEMENT / ECONOMIC LIFE CALCULATIONS. It is a misconception to take into account past costs or purchase price when evaluating replacement or retiring options. Past costs are SUNK COSTS and should NOT be considered. Only current and future costs / investments are relevant and must be considered. 7 IE 492 Engineering Economics
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DEPRECIATION & TAXES Depreciation is defined as the amount of the asset that is charged off in a given year / given timeframe. Depreciation is an ‘Expense’ in accounting terms. It is not an expense where any cash is being expended, but is rather an expense where the value of an asset is decreased. Example: Consider you bought a brand new car at a dealership for $50,000. Assuming you put very few miles on the car during the year, and now you want to sell it? Can you expect to get $50,000 for the same? No! while you may not have driven the car as much, the asset has depreciated within one year and has lost some value. 8 IE 492 Engineering Economics
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DEPRECIATION & TAXES (CONT.) This concept applies to all assets and equipment purchased by the company. Asset value is recorded on the books at purchase, and is then reduced annually by the amount of depreciation. How do we calculate how much value to deduct in a annual year? Following methods are used and accepted as GAAP Generally Accepted Accounting Principles Straight Line Method* (* we will discuss only this method in this course) Declining Balance Method Sum of Years Method Sinking Fund Method Group and Composite Depreciation Accelerated Cost Recovery System (ACRS) 9 IE 492 Engineering Economics
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DEPRECIATION & TAXES (CONT.) Straight Line Method: Is the most simple depreciation methodology. A
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