Depreciation schemes

The determination of the present value for the depreciation plans is one of the best ways of comparing depreciation plans. In calculating the present value it will be assumed that depreciation expenses remain in the company and effectively reduce income taxes. If the income tax rate on earnings is 48%, then the amount of income tax saved when depreciation expenses are increased by 100 is 48. Therefore, the net savings of including depreciation as an expense is 48% of all depreciation. If the net salvage value is less than the book value after depreciation, the difference is an income and is subject to taxation. Since the amount will be the same for each of the depreciation schemes, it will not be considered in comparing the different methods. 

The SOYD and the DDE methods are examples of accelerated depreciation schemes (relative to the straight line). It is shown in Section 9.8 that accelerated depreciation has significant economic advantages over the straight-line method. 

A scheme for corporate tax reduction based on an instant depreciation of the entire investment and a special deduction to a value of 40% of the investments. For energetic utilisation of thermal technologies a criterion of 40% energy efficiency is applied. 

In Table 8.5, the overall investment costs and depreciation were reported. At this early stage, modifications required to the Claus unit are not completely mastered however, a sizable difference between the two schemes emerges, and the novel scheme has a slightly better yearly depreeiation. 

Calculate the return on investment for this scheme to install batteries. (You may assume a straight-line depreciation on the batteries.)... 

Which scheme is superior economically Explain succinctly. State the basis for your choice. For example, is your choice based on the lowest depreciation Assume the cost of a unit is directly proportional to its input capacity, in kg/min A unit twice as large costs twice as much. Energy costs are directly proportional to the amount of energy consumed. (This exercise appeared on an exam. It was estimated that the exercise could be completed in 20 minutes.)... 

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