Depreciation provisions

Our analysis of the impact of tax policies on technological innovation also leads us to conclude that consideration would be given to special measures to encourage investment in research eind development. The complexity and sophistication of modem research facilities and equipment are Increasing much more rapidly than is recognized by the present tax system. To help mainteiin an efficient and effective industrial R D resource, we recommend the depreciation provisions of the Tax Code be amended to allow "Flexible depreciation" of all such fixed assets. 

Other government incentives can focus on reducing the tax burden for which companies are liable, as a means to free up resources to fund investment. Effectively, this provides an additional margin that can make local products more competitive in the transition period, as companies learn to operate facilities more efficiently. Examples of incentives to achieve these intents are tax holidays and special depreciation provisions. The latter were once again used in India where companies... 

The revenue from the annual sales of product As, minus the total annual cost or expense required to produce and sell the product Af , excluding any annual provision for plant depreciation, is the annual cash income Ac( ... 

The relationships among the various annual costs given by Eqs. (9-1) through (9-9) are illustrated diagrammaticaUy in Fig. 9-1. The top half of the diagram shows the tools of the accountant the bottom half, those of the engineer. The net annual cash flow Acp, which excludes any provision for balance-sheet depreciation Abd, is used in two of the more modern methods of profitability assessment the net-present-value (NPV) method and the discounted-cash-flow-rate-of-return (DCFRR) method. In both methods, depreciation is inherently taken care of by calculations which include capital recoveiy. 

Let us consider plant eqmpment costing I million and purchased on Jan. I, 1988. T le 9-18 ows the provision for the depreciation account for 1988, 1989, and 1990 for straight-line depreciation, assuming a service hfe of 10 years and zero scrap value. The credit entries of 100,000 for the depreciation in each year are balanced by the depreciation charge of 100,000 debited to the income statement (or trading and profit-and-loss account) in each year. Table 9-19 shows the corre-... 

Installation of control systems may have a positive economic benefit which will offset a portion of their cost (2). Such benefits include (1) tax deduction provisions, (2) recovery of materials previously emitted, (3) depreciation schedules favoring the owner of the source, and (4) banking or sale of the emission offset credits if the source is in a nonattainment area. 

Neither of these methods makes provision for including land and working capital, and no consideration is given to cash flows that occur in a project s later years after the depreciable fixed investment has been recovered for projects that earn most of their profit in the early years. 

In calculations it is also important to take into account ar r income that may be expected from development grants etc. tax liabilities and the depreciation that takes place on capital items expenditure. This second sum needs to be set aside so that provision can be made to replace capital items at the end of their lifetime, especially as the effects of inflation may be different for the various items involved in the costing. Once the capital equipment has been depreciated then profitabihty can rise, since only variable costs have to be covered. Thus for instance the selling price of a product can be decreased, even down to the production cost, in order for example, to force a new competitor out of business. 

Fm// costing. This form of costing takes all expenses into account, including direct costs such as raw materials, and also indirect costs—such as head office expenses, insurance costs, design fees, contingency provisions, services, maintenance and depreciation. 

Miscellaneous Cranes.— Wall and jib cranes, whether stationary or of the traveling type, hoists of various kinds and all other varieties of cranes lend themselves to economic selection and analyses as to probable net cost of operation along lines very similar to those followed in the case of overhead electric cranes. A full knowledge of operating requirements is necessary, suitable provisions should be made for possible expansion, and the mistake avoided of assuming too great a mechanical efficiency for the equipment. An intimate knowledge of costs— labor and equipment—and depreciation expenses is also required for even such approximate estimates, if they are to be at all reliable. 

The0ther three provisions were i) an allowance for faster depreciation of R D assets (discussed earlier in the text), 2) an increase n the deduction for newly manufactured research equipment donated to universities, and 3) a 2-year suspension of a 1977 Treasury Department regulation (FR 1.861-8) requiring a portion of R D expenses for products or processes sold abroad to be allocated against foreign sales, thus reducing the value of the R D deduction for U S. taxes (also discussed earlier in the chapter) (357). 

The Pressure of Capital. Today a major challenge is that some provision must be made to absorb the monies which have become available as a result of prosperous years of operation. Most companies find themselves in the position of having money to spend and too few ideas on which to spend it. The supply of money is generated from earnings, depreciation, and amortization. A well-run industrial concern has two choices. It can either pass these monies on to the stockholder as dividends or use them in capital expansion, conserving and multiplying them. To protect and increase the value of stockholder investments the favorability of the second choice is obvious, and the pressure to expand becomes so great that companies may often invest... 

Fixed costs reflect the influence of investments in operating cosL They include jnainte-nance. taxes and insurance and overheads which amount on the whole to about 7 per cent of the cost of the units (/, + /,). a provision for depreciation (10 per cent of depreciable capital for linear depreciation of the facilities over ten years), and. depending on the economic calculation method adopted, financial charges (7 per cent depreciable capital on the average, and 9 per cent of working capital). 

TABLE 9-18 Provision for Depreciation of Piant-Equipment Account... 

CF (Cash Flow) is defined as Income Before Extraordinary Items, i.e. a company s income after all expenses except provisions for dividends, to which depreciation and amortization charges are added ... 

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