Depreciation annual amount

In the first case, the annual taxable income is reduced by an annual depreciation charge or allowance which has the effect of reducing the annual amount or tax payable. The annual depreciation charge is merely a book transac tion and does not involve any expenditure of cash. The method of determining the annual depreciation charge must be agreed to by the appropriate tax authority. 

On the basis of straight-line depreciation, the average annual amount of depreciation Aq over a service life of s years is given by... 

On the basis of sum-of-years-digits depreciation, the annual amount of depreciation for a specified number of years s for a plant of fixed-capital cost Cpc, scrap v ue S, and service life s is given by... 

An investigation of a proposed investment has been made. The following result has been presented to management The minimum payout period based on capital recovery using a minimum annual return of 10 percent as a fictitious expense is 10 years annual depreciation costs amount to 8 percent of the total investment. Using this information, determine the standard rate of return on the investment. 

When (NPV) and (DCFRR) are computed, depreciation is not considered as a separate expense. It is simply used as a permitted writing-down allowance to recfuce the annual amount of tax in accordance with the rules applying in the country of earning. The tax payable is deducted in accordance with Eq. (9-2) in the year in which it is paid, which may differ from the year in which the corresponding income was earned. 

Second term [ t P - S)/n) P/A, z %, n)] The second term in this equation describes the depreciation of a system. The portion enclosed in braces expresses the annual amount of tax credit permitted. The portion in parentheses translates these as equal amounts back to time zero by converting them to PW. 

DecoveTj of Capital. In Figure 1, the annual book depreciation is used to retire the fixed capital investment. Whereas this accounting model does not correspond to the typical money flow, it is one possible model for recovery of capital. This model assumes that the investment is reduced each year by the amount of the annual depreciation. Another model (22) assumes that a uniform yearly book depreciation payment is made to an interest-bear sinking fund that accumulates to the depreciable fixed capital amount at the end of the venture. Using this second model, the investment is outstanding throughout the lifetime of the project. This also does not correspond to the actual money flow in most cases. ProfitabiUty analysis utilizes a third model based on discounted cash flows. 

A fourth method of computing depreciation (now seldom used) is the sinking-fund method. In this method, the annual depreciation A is the same for each year of the life of the equipment or plant. The series of equal amounts of depreciation Aq, invested at a fractional interest rate i and made at the end of each year over the life of the equipment or plant of s years, is used to build up a future sum of money equal to (Cpc S). This last is the fixed-capital cost of the equipment or plant minus its salvage or scrap value and is the total amount of depreciation during its useful life. The equation relating i Fc S) and Ao is simply the annual cost or payment equation, written either as... 

Although Abd does not affec t working capital in any way, the annual depreciation charge Ad does affec t the annu amount of tax A,r given by... 

It was reported by Enviroaccess in 1996 that the purchase of an Amphibex excavator required a total investment of between 395,000 and 450,000, depending on the tools needed. It was not specified whether this amount was listed in Canadian or U.S. dollars. Operating costs, calculated on an annual basis of 2000 hr of work, are about 80/hr. This amount does not include personnel costs (operators and labor) but does take into account annual depreciation of the machine, insurance, routine maintenance, fuel costs, and normal wear and tear (D18700S, p. 2). 

The P/A ratio is known as the uniform-series present-worth factor. The annual cash flow may be discounted to present worth by multiplication by P/A. Multiplication of present value by A/P gives the amount of annual cash flow. The factors P/F, P/A and A/P for a period of 30 years at interest rates of 6, 8, 10, 12, 15 and 20% for a period of 1-30 years are given in Table 5.1. Depreciation D is an annual tax allowance for the... 

When the double declining method is considered, = 2/N, the annual depreciation is twice that of straight-line depreciation and the amount depreciated decreases with increase in the value of n. In the case of double declining balance depreciation method, the book value P—HDn in the nth year is given by4 ... 

The cost for land and the accompanying surveys and fees depends on the location of the property and may vary by a cost factor per acre as high as thirty to fifty between a rural district and a highly industrialized area. As a rough average, land costs for industrial plants amount to 4 to 8 percent of the purchased-equipment cost or 1 to 2 percent of the total capital investment. Because the value of land usually does not decrease with time, this cost should not be included in the fixed-capital investment when estimating certain annual operating costs, such as depreciation. 

Total amount of depredation = 12,000 — 2000 = 10,000 = S Equal payments per year = R = yearly cost due to depreciation Number of payments = n = 10 Annual interest rate = i = 0.06. 

Example 6 Application of annuities in determining amount of depreciation with continuous cash flow and interest compounding. Repeat Example 5 with continuous cash flow and nominal annual interest of 6 percent compounded continuously. 

In the straight-line method for determining depreciation, it is assumed that the value of the property decreases linearly with time. Equal amounts are charged for depreciation each year throughout the entire service life of the property. The annual depreciation cost may be expressed in equation form as follows ... 

Example 1 Determination of rate of return on investment-consideration of income-tax effects. A proposed manufacturing plant requires an initial fixed-capital investment of 900,000 and 100,000 of working capital. It is estimated that the annual income will be 800,000 and the annual expenses including depreciation will be 520,000 before income taxes. A minimum annual return of 15 percent before income taxes is required before the investment will be worthwhile. Income taxes amount to 34 percent of all pre-tax profits. 

The two alternatives in this example are to continue the use of the present equipment or to make the suggested replacement. In order to choose the better alternative, it is necessary to consider both the reduction in expenses obtainable by making the change and the amount of new capital necessary. The only variable expenses are those for operation and depreciation. Therefore, the annual variable expenses for the proposed equipment would be 15,000 + 40,000/10 = 19,000. 

A proposed chemical plant will require a fixed-capital investment of 10 million. It is estimated that the working capital will amount to 25 percent of the total investment, and annual depreciation costs are estimated to be 10 percent of the fixed-capital investment. If the annual profit will be 3 million, determine the standard percent return on the total investment and the minimum payout period. 

A second alternative requires construction and operation of new facilities at a location about 50 miles from the present plant. This alternative is attractive because cheaper labor is available at this location. The new facilities would cost 200,000. Labor costs would be 120,000 per year. Overhead costs would be 70,000 per year. Annual insurance and taxes would amount to 2 percent of the initial cost. All other costs except depreciation would be the same at each location. If the minimum return on any acceptable investment is 9 percent, determine the minimum service life allowable for the facilities at the distant location for this alternative to meet the required incremental return. The salvage value should be assumed to be zero, and straight-line depreciation accounting may be used. 

These figures are more conservative than those often quoted, and the residual values are higher. Experience indicates that used-up machinery ordinarily finds a market at second-hand prices considerably above those prevailing for junk material. Negative residual values are possible. The hfe of items like foundations is limited by that of the associated equipment. If A = amount to be realized to offset depreciation = initial cost—residual value, n = estimated life, r = rate of interest, S = annual depreciation charge, then... 

This value shows that 1638 /yr should be accumulated yearly in a depreciation fund at annual interest of 10% to account for the decrease in the equipment value. For this reason this type of depreciation is known as sinking-fund method. Note that the purchasing and scrap value are referred to the same present value. Thus, rent the equipment could bring 300x12= 3600 /year, an amount that would cover largely the depreciation. 

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