Depreciation methods straight-line

For this example, the tax-basis depreciation method in line-item 11 is a straight-line calculation based on the capitalized fixed capital, ie, fixed capital plus interest to the start of operation any salvage should be subtracted from the capitalized fixed capital and the result divided by the number of expected operating years to obtain the aimual tax-basis depreciation. 

Multiple straight-line depreciation The straight-line method is applied over several periods, being short at first and then increasing as the life of the equipment is extended beyond the original estimate. 

Fixed capital investments are characterized by the fact that they have to be replaced after a number of years commonly referred to as service life or useful life period. This replacement is not necessarily due to wear and tear of equipment. Other factors include technological advances that may render the equipment obsolete. Furthermore, over the usefiil life of the equipment, the plant should plan to recover the capital cost expenditure. In this regard, the notion of depreciation is useful. Depreciation or amortization is an annual allowance which is set aside to account for the wear, tear, and obsolescence of a process such that by the end of the useful life of the process, enough fund is accumulated to replace the process. The simplest method for determining depreciation is referred to as the straight line method in which... 

What must be the selling price if the return on the investment before taxes of the fully operating plant is to be 30% Assume that the plant is to be fully depreciated in 12 years using a straight-line method. 

The straight-line depreciation method reduces the asset value by the same amount for each year of the plant s expected life. The amount can be determined by dividing the total amount that can be depreciated by the number of years the plant is expected to last. This is the easiest of the depreciation methods. 

For Example 11-1 compute the depreciation rate per year. Assume the plant will last 11 years. Use the straight-line method of depreciation. 

If, however, in the fourth year the straight-line depreciation method had been adopted, the full plant could be depreciated by the end of 6 years. At the beginning of the fourth year the book value was 1,778,000 and there were 3 years of expected life remaining. By the straight-line method this would mean the plant should be depreciated 593,000 in each of the last 3 years. 

The answers obtained in Example 1 1-6 are typical of those usually obtained. If earnings are the only consideration, the straight-line depreciation method is the worst plan to use. However, the present values for the other methods are generally so close that no obviously best one can be picked. 

But earnings are not the only consideration. In 1968 the Union Carbide Corporation, along with many other companies, had a very bad year financially. In order to make its financial picture look better it switched from the double declining balance method of depreciation to the straight-line method. This reduced expenses (deprecitation being considered an expense) and hence increased profits. This is a semipermanent move, however, since a return to the double declining balance method would require approval of the Internal Revenue Service. 

Amortization is basically the same as depreciation except that it applies to intangible property, such as franchises, designs, drawings, or research expenses. Generally straight-line depreciation methods must be used, and only certain items that are amortized can be deducted as expenditures for federal income tax purposes. The value of goodwill, trademarks, and trade names generally cannot be amortized. 

It has a salvage value of 2000,000 and a net salvage value of 1,200,000. Assume the plant will last 7 years. Use (a) straight-line depreciation (b) double declining balance method (c) sum of the years-digits method... 

Depreciation The Internal Revenue Service allows a deduction for the exhaustion, wear and tear and normal obsolescence of equipment used in the trade or business. (This topic is treated more fufly later in this section.) Briefly, for manufacturing expense estimates, straight-line depreciation is used, and accelerated methods are employed for cash flow analysis and profitability calculations. 

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. 

Example 10 Choice among Alternatives Two filters are considered for installation in a process to remove solids from a liquid discharge stream to meet environmental requirements. The equipment is to be depreciated over a 7-year period by the straight-line method. The income tax rate is 35 percent, and 15 percent continuous interest is to be used. Assume that the service life is 7 years and there is no capital recovery. Data for the two systems are as follows ... 

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. 

Depreciation. Depreciation arises from two causes deterioration and outdatedness (economically). These two causes do not necessarily operate at the same rate, and the one having the faster rate determines the economic life of the project. Depreciation is an expense, and there are several permissible ways of allocating it. For engineering purposes, depreciation is usually calculated by the straight-line method for the economic life of the project. Frequently, economic lives of 10 years or less are assumed for projects of less than 250,000. 

Typically, a chemical company will depreciate its plant and equipment (on-sites) at 10-15%, and its buildings (off-sites) at 5-8% (a lower rate because they may be reusable for some other purpose when the plant s life is over). The actual values used will be what the company and its auditors think appropriate and prudent. The depreciation allowance is usually linear ( straight-line , i.e. same amount each year) but other methods are used, e.g. declining value (same percentage of value at start of each year), which leaves a terminal value at the end of the plant s life, which has then to be written off at one go. 

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 ... 

Income-tax laws permit recovery of funds by two accelerated depreciation schedules as well as by straight-line methods. Since cash-flow timing is affected, choice of depreciation method affects profitability significantly. Depending on the ratio of depreciable to nondepreciable assets involved, two projects which look equivalent before taxes, or rank in one order, may rank entirely differently when considered after taxes. Though cash costs and sales values may be equal on two projects, their reported net incomes for tax purposes may be different, and one will show a greater net profit than the other. 

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 ... 

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. 

The straight-line method may be applied on the basis of units of production or predicted amount of service output, instead of life years. The depreciation may be based on miles, gallons, tons, number of unit pieces produced, or other measures of service output. This so-called unit-of-production or service-output method is particularly applicable when depletion occurs, as in the exploitation of natural resources. It should also be considered for properties having useful lives that are more dependent on the number of operations performed than on calendar time. 

Comparison of straight-line, multiple straight-line, sum-of-the-years-digits, and declining-balance methods for determining depreciation. 

Prior to 1954, the United States government would not accept any depreciation method which permitted depreciation rates more than 50 percent greater than those involved in the straight-line method. In 1954, the laws were changed to allow rates up to twice (200 percent) those for the straight-line method. Under these conditions, one arbitrary method for choosing the value of... 

Asset values of property when depreciated by interest (sinking fund) and no-interest (straight-line) methods. 

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