Depreciation Recovery System

Depreciation. This is a noncash cost that accumulates money to rebuild the facilities after the project life is over. There are usually two depreciation rates. One is the corporation s book depreciation, which reflects the expected operating life of the project. The other is the tax depreciation, which is usually the maximum rate allowed by tax laws. To be correct, the tax depreciation should now be called Accelerated Capital Cost Recovery System (ACRS). 

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 ... 

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... 

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. 

Corrosion economics and corrosion management forms the theme of the fifth chapter. Discounted cash flow calculations, depreciation, the declining balance method, double declining method, modified accelerated cost recovery system and present worth calculation procedures are given, together with examples. In the second part, corrosion management, including the people factor in corrosion failure is briefly presented. Some of the expert systems presently available in the literature are briefly discussed. 

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. 

The statutory class lives for the Modified Accelerated Cost Recovery System are as follows where the key factor is the ADR (Asset Depreciation Range) midpoint designation, which corresponds in general to the asset guideline period shown in Table 2 ... 

Recovery System (MACRS). Note that MACRS is based on a 200 percent declining balance for this class life with a switch to straight-line depreciation at the time appropriate to maximize the deduction. It is also based on salvage value being zero. The half-year convention in the first and last years applies. Use an initial property value of 22,000 to permit comparison of results to Fig. 9-4. 

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. 

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. 

Depreciation of capital falls under the authority of governmental tax agencies. The assets are categorised in classes of different lifetimes, as for example 3, 5,1, 10, 15 and 20 years. The depreciation factors are adapted to reflect the most rational replacement policy from taxation viewpoint. As illustration, in USA the tax reform act from 1986 defined a Modified Accelerated Cost Recovery System (MACRS). Process equipment falls in 5-year class, as shown in the following table ... 

Depreciation follows the United States Modified Accelerated Cost Recovery System (MACRS). Under IRS regulations, most utility-type investments use either a 15- or 20-year depreciation schedule. Certain investments, such as renewables, are allowed to use a 5-year depreciation schedule. The capital recovery factor (CRF) is calculated using... 

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). 

The annualized capital cost (ACC) is the product of the CRF and TCC and represents the total instaUed equipment cost distributed over the lifetime of the project. The ACC reflects the cost associated with the initial capital outlay over the depreciable life of the system. Although investment and operating costs can be accounted for in other ways such as present-worth analysis, the capital recovery method is preferred because of its simplicity and versatUity. This is especiaUy true when comparing somewhat similar systems having different depreciable lives. In such decisions, there are usuaUy other considerations besides economic, but if all other factors are equal, the alternative with the lowest total annualized cost should be the most viable. 

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. 

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 ... 

The levelized prices of PV electricity and H2 are derived by net present value cash flow analysis. The net present value cash flow method is described in Appendix A.l. A straight tine, ten-year depreciation schedule is applied with an annual depreciation rate of 9% of capital. The levelized PV electricity and H2 prices are derived by choosing PV electricity and H2 prices to generate a revenue level that results in a cumulative, net cash flow stream with a 0 net present value over the thirty-year capital recovery period. The annual net cash flow streams are discounted at the present value of the 6%-discount rate. Investment funds are allocated in year 1 construction occurs in year 2 and H2 cash flow begins in year 3. The modular design of PV electrolysis plants and H2 distribution systems enables the rapid initiation of H2 marketing and cash flow. 

Many of the PV electrolytic H2 production and distribution system components have an operating life that will exceed the assigned thirty-year capital recovery period. With the amortization of debt capital and the depreciation of equity capital assets, post-year-thirty H2 production and distribution costs will decline. With the capital amortization of system components, H2 production cost is reduced to O M expenses for those system components. Therefore, it makes sense to evaluate both first and second generation H2 production costs. First generation H2 production is defined as the initial thirty-year capital recovery period, and second generation H2 production is defined as the post-amortization, Year 31-Year 60 H2 production period. 

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