Depreciation cost

Depreciation costs can drop from as high as 50% of the total manufacturing cost to less than 10% as the plant ages. The effect of the changing depreciation rates is tempered if after-tax analysis is used. 

A summary of other pertinent costs in the states near customers is given in Table 2E-5. If it were known how each of these items affects the final cost, the various sites could be rated quantitatively. For instance, suppose the average energy costs are 2% of the selling price, before-tax profits are 30%, depreciation costs amount to 5%, and production labor costs are 10%. These items would reduce profits in Illinois by ... 

In the straight-line (SL) depreciation, it is assumed that the equipment value declines linearly with respect to time. The annual depreciation cost (d) is... 

At the conclusion of DOE testing in 1996, AECL developed a cost estimate for the treatment of contaminated soil using the technology as part of a treatment train. The combined cost of soil leaching and leachate treatment was estimated to be 340 per ton of treated soil (DOE/Femald soil). This estimate included all operating and capital depreciation costs for a plant life of 5 years. The cost estimate also assumed the reuse of the recovered uranium from the soil treatment at an existing Canadian facility (D17560U, p. 68). 

In Equation 8.3-1, D is depreciation, FCI is fixed-capital investment, t is the number of years over which the depreciation is accounted for, and S is the salvage value. Thus S is the value the plant could be sold for after the t years of operation. In this discussion we assume that the plant lasts for ten years, and that its salvage value is zero. With the straight-line method, annual depreciation costs are constant. Other methods, such as the sum-of-the-years-digits method, determine depreciation costs to be greater in the early years of the property than in the later years. Local regulatory laws generally define which method can be used to determine depreciation costs. 

When interest, insurance, and depreciation costs of the basic plant (one that does not include the test features, etc.) are added and the labor requirement is reduced to that to operate a normal production plant, the total water cost is about 1.04 per 1000 gallons, again based on projected 1963 co ts. If the costs shown on Figure 1, which were estimated in 1955, were projected to 1963 conditions, the total water cost would be... 

In order to maximize the net present value of after-tax cash flows the model proposed in Chapter 3.4.2 has to be extended to determine the taxes payable in each country. To this end, pre-tax country profits comprising profits realized at both production and distribution entities have to be calculated. While the pre-tax profit of distribution entities can be calculated easily by subtracting all costs incurred from revenues realized, additional adjustments are required for production entities. Instead of cash flows associated with capital investments, depreciation costs have to be considered to identify pre-tax profits. The following assumptions are made to simplify the calculation ... 

Profits at the site level are calculated in equation (3.84) by subtracting all costs incurred at the site from the revenues realized at the site from finished and intermediate products as calculated by equation (3.85). In addition to the cost items already contained in the basic model formulation, the costs of intermediates received from other sites have to be allocated to the receiving site for tax purposes and the depreciation costs have to be subtracted instead of investment expenditures. Equation (3.86) defines that depreciation costs are calculated by adding to the depreciation plan of old assets (which has to be determined outside the model) depreciation incurred from new investments. Based on the assumption of straight-line depreciation and a depreciation period that exceeds the planning horizon these costs can be calculated as a fixed percentage of the total investments incurred at a site. 

Because Federal income taxes are based on gross earnings, which means that all costs have been deducted, the U.S. Treasury Department has devoted considerable effort to controlling one of the major costs in industrial operations, i.e., the cost for depreciation. The subject of depreciation costs is considered in Chap. 9, where some of the tax regulations by the U.S. Treasury Department are discussed. 

In determining the influence of depreciation costs on income taxes, it should be clear that depreciation costs represent a deduction from taxable gross earnings. Thus, if d is the depreciation cost for the year and 4> is the fractional... 

Because the engineer thinks of depreciation as a measure of the decrease in value of property with time, depreciation can immediately be considered from a cost viewpoint. For example, suppose a piece of equipment had been put into use 10 years ago at a total cost of 31,000. The equipment is now worn out and is worth only 1000 as scrap material. The decrease in value during the lo-year period is 30,000 however, the engineer recognizes that this 30,000 is in reality a cost incurred for the use of the equipment. This depreciation cost was spread over a period of 10 years, and sound economic procedure would require part of this cost to be charged during each of the years. The application... 

Consideration of depreciation as a cost permits realistic evaluation of profits earned by a company and, therefore, provides a basis for determination of Federal income taxes. Simultaneously, the consideration of depreciation as a cost provides a means whereby funds are set aside regularly to provide recovery of the invested capital. When accountants deal with depreciation, they must follow certain rules which are established by the U.S. Bureau of Internal Revenue for determination of income taxes. These rules deal with allowable life for the depreciable equipment and acceptable mathematical procedures for allocating the depreciation cost over the life of the asset. 

The extent of maintenance and repairs may have an effect on depreciation cost, because the useful life of any property ought to be increased if it is kept in good condition. However, a definite distinction should always be made between costs for depreciation and costs for maintenance and repairs. 

It is difficult to predict future market values or replacement values with a high degree of accuracy because of fluctuations in market demand and price conditions. On the other hand, a future book value can be predicted with absolute accuracy as long as a constant method for determining depreciation costs is used. It is quite possible for the market value, replacement value, and book value of a property to be widely different from one another because of unrealistic depreciation allowances or changes in economic and technological factors. 

Because of its simplicity, the straight-line method is widely used for determining depreciation costs. In general, design engineers report economic evaluations on the basis of straight-line depreciation unless there is some specific reason for using one of the other methods. 

When the declining-balance method is used, the annual depreciation cost is a fixed percentage of the property value at the beginning of the particular year. The fixed-percentage (or declining-balance) factor remains constant throughout the entire service life of the property, while the annual cost for depreciation is different each year. Under these conditions, the depreciation cost for the first year of the property s life is Ff, where f represents the fixed-percentage factor. At the end of the first year... 

In the application of the sum-of-the-years-digits method, the annual depreciation is based on the number of service-life years remaining and the sum of the arithmetic series of numbers from 1 to n, where n represents the total service life. The yearly depreciation factor is the number of useful service-life years remaining divided by the sum of the arithmetic series. This factor times the total depreciable value at the start of the service life gives the annual depreciation cost. 

R = uniform annual payments made at end of each year (this is the annual depreciation cost), dollars... 

Since the value of R represents the annual depreciation cost, the yearly cost for depreciation is constant when the sinking-fund method is used. As shown in Fig. 9-3, this method results in book values which are always greater... 

The same approach used in the sinking-fund method may be applied by analyzing depreciation on the basis of reduction with time of future profits obtainable with a property. When this is done, it is necessary to use an interest rate equivalent to the annual rate of return expected from the use of the property. This method is known as the present-worth method and gives results similar to those obtained with the conventional sinking-fund approach. The sinking-fund and the present-worth methods are seldom used for depreciation cost accounting but are occasionally applied for purposes of comparing alternative investments. 

Comparison of the various depreciation methods shows that the declining-balance and the sum-of-the-years-digits methods give similar results. In both cases, the depreciation costs are greater in the early-life years of the property than in the later years. Annual depreciation costs are constant when the straight-line, sinking-fund, or present-worth method is used. Because interest effects are included in the sinking-fund and present-worth methods, the annual decrease in asset value with these two methods is lower in the early-life years than in the... 

A reactor of special design is the major item of equipment in a small chemical plant. The initial cost of the completely installed reactor is 60,000, and the salvage value at the end of the useful life is estimated to be 10,000. Excluding depreciation costs... 

In order to make it worthwhile to purchase a new piece of equipment, the annual depreciation costs for the equipment cannot exceed 3000 at any time. The original cost of the equipment is 30,000, and it has zero salvage and scrap value. Determine the length of service life necessary if the equipment is depreciated (a) by the sum-of-the-years-digits method, and (b) by the straight-line method. 

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