Argentum Solutions, Inc.
Sterling guidance on corrosion and materials degradation
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| Corrosion Economics Estimator |
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David C. Silverman |
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Items considered as capital expenditure can be depreciated over their lifetime. Such depreciation is deducted from income for tax purposes. As such, depreciation is like a credit that can be considered for present value calculations like a simple annuity. A number of depreciation methods exist. In order to enable the user to examine the effect of depreciation on present value, two methods are included in FINCALC, the "straight line method" and the "200% declining balance" method over 5 years. Depreciation is assumed to start the year that all equipment is placed in service and functionality is achieved. The credit is the dollar amount of depreciation times the tax rate. The first schedule is "straight line depreciation". This schedule divides the difference between the total capital expenditure and the salvage value by the number of years over which depreciation is to be taken. For example, if the capital expenditure is $10000, the salvage value at the end of life is $2000, and the equipment life is 10 years from when the capital is put in service, the depreciation is $800 per year. The depreciation is treated like a simple annuity with payment at the start of the year in which the capital is put into service. The second method is the 200% declining balance method with an assumed 5 year depreciated life. This method uses the entire capital expenditure so the equipment has no salvage value at the end of the life. Other declining balance methods exist. In FINCALC, this method uses the half year convention which means depreciation is taken for a half year the first year, the full years 2 through 5, and for a half year in the last (sixth) year. The declining balance method resorts to straight line depreciation in the year that the straight line method provides greater depreciation than the declining balance method. Thus, two depreciation methods have to be calculated for each year. As an example, suppose that $10000 is supposed to be depreciated by this method. In the first year, the depreciation is (200%)($10000)(1/2 year)/5years = $2000. The straight line depreciation is ($10000)(1/2year)/5 years = $1000. The declining balance is greater so it is used. In the second year, since $2000 was already claimed, the adjusted basis becomes $8000. The declining balance depreciation is (200%)($8000)/(5years) or $3200. The straight line depreciation is ($8000)/(4.5 years) or $1778. The declining balance is greater so it is used. In the third year, since an additional $3200 was already claimed, the adjusted balance is $4800. The declining balance depreciation is (200%)($4800)/(5years) or $1920. The straight line depreciation is ($4800)/(3.5years) or $1371. The declining balance method is used. In the fourth year the adjusted basis is $2880. The declining balance depreciation is (200%)($2880)/(5years) or $1152. The straight line depreciation is ($2880)/(2.5years) or $1152. Since the declining balance is less than or equal to the straight line depreciation amount, the switch is made to the straight line depreciation. In the fifth year the adjusted basis becomes $1728. The straight line depreciation is ($1728)/(1.5years) or $1152. In the sixth year, the adjusted basis becomes $576. This amount is multiplied by 100% to obtain the final deduction of $576. Previous Page: Capital Expenditure Input Next Page: Periodic Maintenance, Repair, or Other Expenses Input |
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David C. Silverman, Ph.D. - Primary Consultant |