Here's the text extracted from your PDF (cleaned up for readability):
Depreciation
The following definitions apply to every type of depreciation:
B – Cost Basis
The initial amount of money used for purchasing and preparing an asset for use.
dₖ – Depreciation deduction in year k
The yearly fraction of the asset's value used in the production of income.
BVₖ – Book value at the end of year k
The worth of the asset on the accounting records of the company.
The Three Types of Depreciation
1. Straight Line (SL)
Formula:
dk =
B − SVN
N
Where:
SVₙ = Salvage value of asset
N = Depreciable life of asset
Characteristics:
dk will be the same value every year.
Value at the last year = Salvage value of asset.
2. 200% Declining Balance (DDB)
Formula:
dk = B(1 − R)k−1 R
Where:
R = 2/N
dk decreases each year because the asset loses less value as time goes on.
Depreciation is modeled for assets that lose most of their value at the start of their
lives.
3. MACRS
Formula:
dk = rk (B)
Where:
rk changes every year and is given by the IRS.
rk = Recovery rate.
Used for tax depreciation of assets in the U.S.
Example
In this example we have an asset that has:
3-year life
Cost = $100,000
Salvage value = $20,000
Notice how each type of depreciation has a general theme:
Straight Line uses the same dk .
DDB has dk decreasing by a constant percentage (in this case 1/3).
MACRS follows the provided IRS table.
Depreciation Schedule
Year
SL dk
SL BV
DDB dk
1
26.6k
73.3k
2
26.6k
3
4
Notes
DDB BV
MACRS dk
66.6k
33.3k
33.3k
46.6k
22.2k
11.1k
44.4k
26.6k
20k
7.4k
3.7k
14.8k
n/a
n/a
n/a
n/a
7.4k
MACRS
BV
Since dk doesn't change for Straight Line, the graph forms a straight line.
The DDB graph shows that most depreciation occurs in the earlier years.
MACRS is the only method in this example that uses Year 4.
IRS Recovery Rates for a 3-Year Asset
Year
3-Year Recovery Rate
1
0.3333
2
0.4445
3
0.1481
4
0.0741
Is this conversation helpful so far?
0
