Straight-line depreciation

Federal income tax rate 0.34 Depreciation straight line... 

Depreciation Straight-line method with no salvage value... 

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. 

On the basis of straight-line depreciation, the average annual amount of depreciation Aq over a service life of s years is given by... 

Figure 9-5 shows the fall in book value with time for a piece of equipment having a fixed-capital cost of 120,000, a useful hfe of 10 years, and a scrap value of 20,000. This fall in value is calculated by using (I) straight-line depreciation, (2) double-declining depreciation, and (3) sum-of-years-digits depreciation. 

FIG. 9-6 Effect of straight-line depreciation on rate of return for a project. Abd — annual depreciation allowance A c/ = annual net cash income after tax Awwp = annual net profit after payment of tax Cj = total capital cost. 

In addition, we shall calculate the discounted-cash-flow rate of return (DCFRR) with straight-line depreciation. 

The annual rate of straight-line depreciation of the fixed-capital investment Cfc, from 1,000,000 at startup to a salvage value S, of zero at the end of a productive life s of 10 years, is given hy... 

TABLE 9-5 Annual Cash Flows, Straight-Line Depreciation, and 10 Percent Discount Factor... 

Example 3 Sensitivity Analysis The following data describe a project. Revenue from annual sales and total annual expense over a 10-year period are given in the first three columns of Table 9-5. The fixed-capital investment Cfc is 1 million. Plant items have a zero salvage value. Working capital C c is 90,000, and the cost of land Ci is 10,000. There are no tax allowances other than depreciation i.e., is zero. The fractional tax rate t is 0.50. For this project, the net present value for a 10 percent discount factor and straight-line depreciation was shown to be 276,210 and the discoiinted-cash-flow rate of return to be 16.4 percent per year. 

We shall use these data and the accompanying information of Table 9-5 as the base case and calculate for straight-line depreciation the net present value (NPV) with a 10 percent discount factor and the discoiinted-cash-flow rate of return (DCFRR) for the project with the following situations. 

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-... 

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... 

Expenses associated with the capital cost of equipment. Depreciation will be provided over the useful life of the equipment, varying according to the engineer s estimate. Present-day custom is to write assets down on a straight-line basis, but there are several accepted ways of providing the necessary depletion of the asset value. 

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... 

In the straight-line (SL) depreciation, it is assumed that the equipment value declines linearly with respect to time. The annual depreciation cost (d) is... 

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