Depreciation methods MACRS

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. 

Table 17.9 CDS Class Life for Use with the MACRS Depreciation Method...

Assets (such as machines, cars, and computers) lose their value over a period of time. For example, a computer purchased today by a company for 2000 is not worth as much in three or four years. Companies use this reduction in value of an asset against their before-tax income. There are rules and guidelines that specify what can be depreciated, by how much, and over what period of time. Examples of depreciation methods include the Straight Line and the Modified Accelerated Cost Recovery System (MACRS). 

Current Depreciation Method Modified Accelerated Cost Recoveiy System (MACRS)... 

Depreciation method = Current MACRS over 5 years... 

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. 

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. 

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

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... 

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 ... 

In Example 17.14, the total depreciable capital of a new plant is projected to be 90 million. Compute the annual depreciation by the MACRS method for class lives of 5,7, and 10 yr and the income taxes saved because of depreciation during an 11-year period for a combined federal and state income tax rate of 37%. Assume no salvage value. 

For the process considered in Example 17.14, but with MACRS depreciation for a 5-yr class life as determined in Example 17.27, calculate, over an estimated life of 15 yr, including years 1997-1999 when the plant is being constructed (a) the NPV for a nominal interest rate of 15% compounded annually and (b) the nominal interest rate for the IRR method (i.e., for NPV = 0). For the first 2 yr of plant operation, when at 45 and 67.5% of capacity, the cost of production, exclusive of depreciation, is 55 million and 78 million, respectively. 

Most equipment in a chemical plant has a class life of 9.5 years [1] with no salvage value. This means that the capital investment maybe depreciated using a straight-line method over 9.5 years. Alternatively, a MACRS method over a shorter period of time may be used, which is five years for this class life. In general, it is better to depreciate an investment as soon as possible. This is because the more the depreciation is in a given year, the less taxes paid. As shown earlier in this chapter, money now is worth more than the same amount in the future therefore, it is better to pay less in taxes at the beginning of a project than at the end. 

Exanyle 9.22 illustrates the method by which the MACRS depreciation allowances in Table 9.2 are obtained. 

The current MACRS method for depreciation should be used in your calculations (see Chapter 9. 

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