su14 ie 343 session 23
TRANSCRIPT
8/9/2019 Su14 IE 343 Session 23
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Depreciation and Income Taxes
•
The objective of Chapter 7 is to explain how depreciation afincome taxes, and how income taxes affect economic decisimaking.
• Income taxes usually represent a significant cash outflow. In
chapter we describe how after tax liabilities and after-tax caresult in the after-tax cash flow (ATCF) procedure.
• Depreciation is an important element in finding after-tax caand thus, will be discussed first.
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
8/9/2019 Su14 IE 343 Session 23
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Depreciation
•
Depreciation is the decrease in value of physical properties passage of time.
• It is an accounting concept, a non-cash cost, that establishes an andeduction against before-tax income.
• It is intended to approximate the yearly fraction of an asset’s valuethe production of income.
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Depreciation
•
Depreciable property is …
• tangible (can be seen or touched; personal or real) or intangible (copyrights, patents, or franchises).
• depreciated, according to a depreciation schedule, when it is put i
(when it is ready and available for its specific use).
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
8/9/2019 Su14 IE 343 Session 23
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Depreciation, definitions
•
Cost Basis = initial cost of acquiring an asset• Book Value = the current worth of a depreciably property
• Market Value = amount a willing buyer pays for a property
• Recovery Period = the number of years a property is recove
• Recovery Rate = percentage for each year used to deduct pr
• Salvage Value = estimated value of property at the end of us
• Useful Life = expected period that a property will be used
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
8/9/2019 Su14 IE 343 Session 23
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Straight-Line (SL) Method
•
Straight line (SL): constant amount of depreciation each yeadepreciable life of the asset.
• N = depreciable life
• B = cost basis
• d k = depreciaton in k
• BV k = book value at end of k
• SV N = salvage value
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Straight-Line (SL) Method
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
∗ = , 1 ≤ ≤
= − ∗
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Straight-Line (SL) Method (example)
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Straight-Line (SL) Method (example)
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Depreciation, Declining-Balance (DB) M
•
Declining-balance (DB): a constant-percentage of the remaidepreciated each year.
• The constant percentage is determined by R, where R = 2/N200% declining balance is being used, R = 1.5/N when 150%balance is being used.
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
∗ = [1 − 1 − ]
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DB Method (example)
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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DB Method (example)
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
8/9/2019 Su14 IE 343 Session 23
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DB Method with Switchover to SL
7/18/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)