MACRS depreciation

Rather than explain the complicated rationale behind the allowable rates of depreciation for those classes, Table B.5 just lists the rates for what is called accelerated depreciation (MACRS). Note that for each class you deduct some depreciation after the useful life (class life) expires. You can find other tables for accelerated depreciation for various circumstances in any guide to federal income taxes. If you do not want to choose accelerated rates of depreciation, you can choose straight-line depreciation (SL) using the rates listed in Table B.6. The specific... 

Depreciation = MACRS (6-year schedule given in Chapter 9)... 

Property other than buildings (18-year property) placed into service at the present time must use the modified accelerated cost recovery system (MACRS) in calculating depreciation. Property is classified as having 3, 5, 7, 10, 15, or 20 years life. Some examples are ... 

A piece of capital equipment costs 6000, has a service life of 3 years, and has no salvage value. Compute the depreciation schedules using the following methods SL and MACRS. 

Using a 260/wafer sales price for epitaxial silicon wafers and the United States MACRS tax-basis depreciation schedule, the investor s rate of return (IRR) is 18.3%. In addition, the return on investment (ROI) is 25.3%. These measures increase significantly with small changes in sales price for example, at 273/wafer, the IRR is 29.9%. Note that the economic analysis is somewhat shielded from variations in the price of epitaxial wafers because it is strongly linked to the price of the incoming polished wafers. In other words, the key metric of interest is the value added to the wafer by the epitaxial film deposition. 

The current methods for determining aimual depreciation charges are the straight-line depreciation and the Modified Accelerated Cost Recovery System (MACRS). In the straight-line method, the cost of an asset is distributed over its expected useful life such that the annual charge is... 

Depreciation is entered as an indirect expense on the manufacturing expense sheet based upon the straight-line method. However, when one is determining the after-tax cash flow, straight-line depreciation is removed from the manufacturing expense and the MACRS depreciation is entered. This is illustrated under the section on cash flow. 

Land for the project is available at 300,000. The fixed capital investment was estimated to be 12,000,000. A working capital of 1,800,000 is needed initially for the venture. Start-up expenses based upon past experience are estimated to be 750,000. The project qualifies under IRS guidelines as a 5-year class life investment. The company uses MACRS depreciation with the half-year convention. At the conclusion of the prmect, the land and working capital are returned to management. Develop a cash flow analysis for this project, using a cumulative cash position table (Table 9-25). 

The various products are classified into 3-, 5-, 7-, 10-, 15- and 20-year groups in the modified accelerated cost recovery system (MACRs) in the US in 1986. The annual depreciation prescribed by the MACR system is given in Table 5.2. Some typical products belonging to various classes are noted in Table 5.3. 

Tax-law changes put into effect with the 1981 Economic Recovery Act and modified in 1986 have instituted a new system of depreciation known as the Accelerated Cost Recovery System (ACRS). The latter has replaced the former ADR system for most tangible depreciable property used in a trade or business placed in service on or after January 1, 1981. In the ACRS [or Modified Accelerated Cost Recovery System (MACRS) which went into effect for property put into service on or after January 1, 19871, the recovery of capital costs as depreciation was determined over statutory periods of time using statutory percentages depending on the class life of the property and the number of years since the property was placed in service. The statutory periods of time were generally shorter than the useful life of the asset or the period for which it was used to produce income. 

In general, ACRS allowed one-half of a full year s deduction for property in the year it was placed in service and no deduction in the year when the property was anticipated to be disposed of, although special month-by-month rules could be applied for some cases. Similarly, this so-called half-year convention applied for MACRS as one-half of a full year s deduction for property in the year it was placed in service, but it also allowed one-half of a full year s deduction during the year of disposal. Thus, the years of depreciable values equaled the class years for ACRS and equaled one more than the class years for MACRS. 

For MACRS, the statutory percentages were based on a 200-percent declining balance for class lives of 3, 5, 7, and 10 years and a 150-percent declining balance for class lives of 15 and 20 years with a switch to straight-line depreciation at the time appropriate to maximize the deduction. The half-year convention applied for the first year when property was placed in service and also for the year of disposal. Salvage value was taken as zero. 

For both ACRS and MACRS, the statutory percentages have been calculated for each of a group of class years, and these, in turn, have been related to values of the Class Life Accelerated Depreciation Range (CLADR) as noted earlier. Results are given in Table 3 for ACRS and Table 4 for MACRS. 

Asset values of property when depreciated by Accelerated Cost Recovery System (ACRS), Modified Accelerated Cost Recovery System (MACRS), and double declining-balance (200-percent) metbod with switch to straight-line. 

Under MACRS depreciation, different recovery periods are assigned to different kinds of assets, based on a usable life ( class life ) designated by the U.S. Internal Revenue Service (IRS). For chemical plants and most other processing equipment, the class life is 10 to 16 years and the recovery period is 7 years. It should be noted, however, that for roads, docks, and other civil infrastructure, a 15-year recovery period is used, so some offsite investments are depreciated on a different schedule from that used for the ISBL investment. 

Another important convention within MACRS depreciation is that the method assumes that all property is acquired mid-year and hence assigns half of the full-year depreciation in the first and last years of the recovery period. The result is the schedule of depreciation charges given in Table 6.9. 

Other details of MACRS depreciation are not discussed here, and at the time of writing, the tax law also allows assets to be depreciated by the straight-line method (over the class life, not the recovery period and still following the half-year convention). The tax law is revised frequently and the most recent version of IRS publication... 

A chemical plant with a fixed capital investment of 100 million generates an annual gross profit of 50 million. Calculate the depreciation charge, taxes paid, and aftertax cash flows for the first 10 years of plant operation using straight-line depreciation over 10 years and using MACRS depreciation with a 7-year recovery period. Assume the plant is built at time zero and begins operation at full rate in year 1. Assume the rate of corporate income tax is 35%, and taxes must be paid based on the previous year s income. 

Calculation of the after-tax ROI is complicated if the depreciation term is less than the plant life and if an accelerated method of depreciation such as MACRS is used. In such cases, it is just as easy to calculate one of the more meaningful economic criteria such as net present value or discounted cash flow rate of return, described later. Because of this complication, a pre-tax ROI is often used instead ... 

Net present value is a more useful economic measure than simple payback and ROI, since it allows for the time value of money and also for annual variation in expenses and revenues. Few large projects are completed in a single year and immediately begin production at full capacity. A more typical startup schedule is given in Table 6.10. Net present value is also a more appropriate method to use when considering after-tax income using an accelerated depreciation method such as MACRS. 

Estimate the NPV at a 12% interest rate and the DCFROR for the project described in Example 6.8, using the MACRS depreciation method. 

Calculate the cumulative net present value of the project, at a discount rate of 12%, using MACRS depreciation with a 7-year recovery term. Also, calculate the discounted cash flow rate of return. 

As of 1999, the modified accelerated cost recovery system (MACRS) was in force. The depreciation rates applied to an asset are as follows for most CPI assets with a 7-year life ... 

The current depreciation system is the Modified Accelerated Cost Recovery System (MACRS), and chemical industries are in the seven-year life category. The rates for years one through eight are 14.29, 24.49, 17.49, 12.29, 8.93, 8.92, 8.93, and 4.46, respectively. The depreciation is spread over an eight-year period for a seven-year asset. It is assumed that, during the first year of the life of the asset, full benefit will not be received from the asset. Therefore, a half-year convention is adopted, and the remaining recovery is made in the eighth year. 

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