Chapter 9
Depreciation
Principles of Engineering Economic Analysis, 5th edition
Systematic Economic Analysis Technique
1. Identify the investment alternatives
2. Define the planning horizon
3. Specify the discount rate
4. Estimate the cash flows
5. Compare the alternatives
6. Perform supplementary analyses
7. Select the preferred investment
Principles of Engineering Economic Analysis, 5th edition
Questions about Depreciation
• What is depreciation?
Depreciation is a bookkeeping method
reflecting the reduction in the value of an
asset based on age, use, or output.
• Is depreciation a cash flow?
Depreciation is not a cash flow.
• Why do we consider depreciation?
Depreciation is of interest to us because of
its impact on income taxes (which are cash
flows!)
Principles of Engineering Economic Analysis, 5th edition
Engineers need to learn about depreciation
because their design decisions can affect the way
investments and annual operating costs are
treated from an income tax perspective.
Principles of Engineering Economic Analysis, 5th edition
Depreciation Amount
“The amount of the annual depreciation
depends upon several factors,
including (1) cost basis or investment
in the property, (2) date placed in
service, (3) property class or estimated
useful life, (4) salvage value for certain
methods, and (5) method of
depreciation used.”
Department of Treasury
Internal Revenue Service
Principles of Engineering Economic Analysis, 5th edition
Business expenditures are either expensed
or depreciated. Expensing an expenditure is
akin to depreciating it fully in the year in
which it occurs. Expenditures for labor,
materials, and energy are examples of
items that are fully deducted from taxable
income. Expenditures for production
equipment, vehicles, and buildings, on the
other hand, cannot be fully deducted from
taxable income in the year in which they
occur; instead, they must be spread out or
distributed over some allowable recovery
period.
Principles of Engineering Economic Analysis, 5th edition
Depreciable Assets
Depreciable property (1) must be used in
business or be held for the production of
income, (2) must have a life longer than a
year and be determinable, (3) must be
something that wears out, decays, is
consumed, becomes obsolete, or loses
value from natural causes.
Depreciable property may be tangible or
intangible; tangible property may be real or
personal. Land is “never” depreciable.
Principles of Engineering Economic Analysis, 5th edition
Depreciation Terminology
cost basis: taxpayer’s investment (purchase
price plus improvements, additions, and/or
installation) – also called unadjusted basis
depreciation allowance: the depreciation
charge or deduction for a given year
book value: cost basis less capital
recovered, such as depreciation allowances
– also called unrecovered investment, adjusted
cost basis, and adjusted basis
Principles of Engineering Economic Analysis, 5th edition
Depreciation Terminology (cont’d)
recovery period: time over which the cost
basis can be recovered, keyed to 3, 5, 7, 10,
15, 20, 27.5, or 31.5 years, depending on
type of property involved.
salvage value: estimated market value at the
end of the asset’s useful life
useful life: estimate of duration of use of the
asset by the taxpayer
Principles of Engineering Economic Analysis, 5th edition
Straight-Line (SLN) Depreciation
Let
P = cost basis
F = salvage value
n = recovery period
dt = depreciation allowance for year t
Bt = book value at the end of year t
dt = (P – F)/n =SLN(P,F,n)
Bt = P - tdt
Principles of Engineering Economic Analysis, 5th edition
Example 9.2
A surface mount placement machine is being purchased
for $500,000; it has an estimated useful life of 10 years and
a salvage value of $50,000 at that time. Determine the
depreciation allowance for the 5th year and the book value
at the end of the 5th year using SLN.
P = $500,000; F = $50,000; n = 10; t = 5
d5 = ($500,000 - $50,000)/10 = $45,000
=SLN(500000,50000,10) = $45,000
B5 = $500,000 – 5($45,000) = $275,000
Principles of Engineering Economic Analysis, 5th edition
Example 9.2
A surface mount placement machine is being purchased
for $500,000; it has an estimated useful life of 10 years and
a salvage value of $50,000 at that time. Determine the
depreciation allowance for the 5th year and the book value
at the end of the 5th year using SLN.
P = $500,000; F = $50,000; n = 10; t = 5
d5 = ($500,000 - $50,000)/10 = $45,000
=SLN(500000,50000,10) = $45,000
B5 = $500,000 – 5($45,000) = $275,000
Principles of Engineering Economic Analysis, 5th edition
Notice: no
minus signs
Declining Balance (DB) Depreciation
In addition to the previously defined notation, let
p = declining balance percentage, rate, or
fraction, e.g. 1.5/n, 2/n*
=-RATE(n,,-P,F)
dt = pP(1 – p)t-1 = (1 – p)dt-1
Bt = P(1 – p)t
DB(cost,salvage,life,period,month)
DDB(cost,salvage,life,period,month)
VDB(cost,salvage,life,start_period,end_period,
factor,no_switch)
*When p = 2/n, called double declining balance (DDB)
Principles of Engineering Economic Analysis, 5th edition
Example 9.3
A surface mount placement machine is being purchased
for $500,000; it has an estimated useful life of 10 years and
a salvage value of $50,000 at that time. Determine the
depreciation allowance for the 5th year and the book value
at the end of the 5th year using declining balance
depreciation.
P = $500,000; F = $50,000; n = 10; t = 5
p =-RATE(10,,-500000,50000) = 20.5672%
d5 = 0.205672($500,000)(1.0 – 0.205672)5-1 = $40,939.70
=DB(500000,50000,10,5) = $40,937.30
B5 = $500,000(1.0 – 0.205672)5 = $163,840.00
Principles of Engineering Economic Analysis, 5th edition
Depreciation allowances and book values for Examples 9.2 and 9.4
t
0
1
2
3
4
5
6
7
8
9
10
SLN d t
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
SLN B t
$500,000.00
$455,000.00
$410,000.00
$365,000.00
$320,000.00
$275,000.00
$230,000.00
$185,000.00
$140,000.00
$95,000.00
$50,000.00
DB d t
$103,000.00
$81,782.00
$64,934.91
$51,558.32
$40,937.30
$32,504.22
$25,808.35
$20,491.83
$16,270.51
$12,918.79
DB B t
$500,000.00
$397,000.00
$315,218.00
$250,283.09
$198,724.78
$157,787.47
$125,283.25
$99,474.90
$78,983.07
$62,712.56
$49,793.77
DDB d t
$100,000.00
$80,000.00
$64,000.00
$51,200.00
$40,960.00
$32,768.00
$26,214.40
$20,971.52
$16,777.22
$13,421.77
d5 = DDB(500000,50000,10,5) = $40,960.00
d5 = VDB(500000,50000,10,4,5,2) = $40,960.00
Principles of Engineering Economic Analysis, 5th edition
DDB B t
$500,000.00
$400,000.00
$320,000.00
$256,000.00
$204,800.00
$163,840.00
$131,072.00
$104,857.60
$83,886.08
$67,108.86
$53,687.09
VDB d t
$100,000.00
$80,000.00
$64,000.00
$51,200.00
$40,960.00
$32,768.00
$26,214.40
$20,971.52
$16,943.04
$16,943.04
VDB B t
$500,000.00
$400,000.00
$320,000.00
$256,000.00
$204,800.00
$163,840.00
$131,072.00
$104,857.60
$83,886.08
$66,943.04
$50,000.00
Switching from DDB to SLN with VDB
Excel’s VDB worksheet function includes an
optional feature: it can switch from using a
specified declining balance rate to a straight-line
rate when optimum to do so. But, what criterion is
used to define optimum?
Assuming a TVOM > 0%, since depreciation
charges can be deducted from taxable income,
ATPW is maximized when the PW of depreciation
charges is maximized. Hence, we prefer to
depreciate an asset sooner, rather than later.
Therefore, accelerated depreciation methods are
preferred to SLN depreciation, but only up to a
point, and VDB determines that point.
Principles of Engineering Economic Analysis, 5th edition
Double Declining Balance Switching to
Straight Line Depreciation
The optimum time to switch from DDB to SLN is
when, for the first time, the depreciation allowance
with SLN is greater than the depreciation
allowance with DDB allowance, i.e., switch the first
year for which
(Bt-1 – F)/(n – t + 1) > pBt-1 where p = 2/n for DDB
Principles of Engineering Economic Analysis, 5th edition
Example 9.4
For the surface mount placement machine, when
should a switch from DDB to SLN occur?
Switch at the smallest value of t for which
(Bt-1 – F)/(n – t + 1) > pBt-1
Principles of Engineering Economic Analysis, 5th edition
t
0
1
2
3
4
5
6
7
8
9
10
VDB B t
$500,000.00
$400,000.00
$320,000.00
$256,000.00
$204,800.00
$163,840.00
$131,072.00
$104,857.60
$83,886.08
$66,943.04
$50,000.00
SLN d t
$45,000.00
$38,888.89
$33,750.00
$29,428.57
$25,800.00
$22,768.00
$20,268.00
$18,285.87
$16,943.04
DDB d t
$100,000.00
$80,000.00
$64,000.00
$51,200.00
$40,960.00
$32,768.00
$26,214.40
$20,971.52
$16,777.22
Principles of Engineering Economic Analysis, 5th edition
SLN dt >
DDB dt?
No
No
No
No
No
No
No
No
Yes
VDB d t
$100,000.00
$80,000.00
$64,000.00
$51,200.00
$40,960.00
$32,768.00
$26,214.40
$20,971.52
$16,943.04
$16,943.04
(Bt-1 – F)/(n – t + 1) > pBt-1
t
0
1
2
3
4
5
6
7
8
9
10
VDB B t
SLN d t
DDB d t
SLN dt >
DDB dt?
VDB d t
$500,000.00
$400,000.00 $45,000.00 $100,000.00
No
$100,000.00
$320,000.00 $38,888.89
$80,000.00
No
$80,000.00
$256,000.00 $33,750.00
$64,000.00
No
$64,000.00
$204,800.00 $29,428.57
$51,200.00
No
$51,200.00
$163,840.00 $25,800.00
$40,960.00
No
$40,960.00
$131,072.00 $22,768.00
$32,768.00
No
$32,768.00
($256,000 - $50,000)/(10
– 3)
$104,857.60 $29,428.57
$20,268.00 = $26,214.40
No
$26,214.40
$83,886.08 $18,285.87
$20,971.52
No
$20,971.52
$66,943.04 $16,943.04
$16,777.22
Yes
$16,943.04
$50,000.00
$16,943.04
Since $29,428.57 < $51,200, don’t switch!
Principles of Engineering Economic Analysis, 5th edition
(Bt-1 – F)/(n – t + 1) > pBt-1
t
0
1
2
3
4
5
6
7
8
9
10
VDB B t
$500,000.00
$400,000.00
$320,000.00
$256,000.00
$204,800.00
$163,840.00
$131,072.00
$104,857.60
$83,886.08
$66,943.04
$50,000.00
SLN d t
$45,000.00
$38,888.89
$33,750.00
$29,428.57
$25,800.00
$22,768.00
$20,268.00
$18,285.87
$16,943.04
DDB d t
$100,000.00
$80,000.00
$64,000.00
$51,200.00
$40,960.00
$32,768.00
$26,214.40
$20,971.52
$16,777.22
SLN dt >
DDB dt?
No
No
No
No
No
No
No
No
Yes
VDB d t
$100,000.00
$80,000.00
$64,000.00
$51,200.00
$40,960.00
$32,768.00
$26,214.40
$20,971.52
$16,943.04
$16,943.04
$16,943.04 = ($83,886.08 - $50,000)/(10 – 8)
Since $16,943.04 > $16,777.22, switch!
Principles of Engineering Economic Analysis, 5th edition
Modified Accelerated Cost Recovery System
 SLN is the most commonly used depreciation
method for financial reporting
 MACRS is the most commonly used depreciation
method for computing income tax liability
 MACRS is the only depreciation method approved
for use in the U.S. for income tax purposes
 Two forms of MACRS
 General Depreciation System (GDS) MACRS-GDS uses
200% and 150% DB switching to SLN depreciation
 Alternative Depreciation System (ADS) MACRS-ADS
uses SLN depreciation
(Unless stated otherwise, when we refer to MACRS, we are referring to
MACRS-GDS)
Principles of Engineering Economic Analysis, 5th edition
Modified Accelerated Cost Recovery System
 GDS is based on DDB switching to SLN
 ADS is based on SLN
 Both have pre-established recovery periods for
most property
 Both include a half-year convention, whereby it is
assumed that a property is bought and sold at
mid-year
Principles of Engineering Economic Analysis, 5th edition
MACRS
GDS Property Classes
 3-year property: class life of 4 years or less, e.g.,
over-the-road-tractors, special tools for
manufacture of automobiles, etc.
 5-year property: class life between 4 and 10 yrs,
e.g., automobiles, computers & peripherals, office
equipment, and general – purpose trucks
 7-year property: class life between 10 and 16 yrs,
property without class life, and not included in
27.5 – and 39-year classes, e.g., office furniture
and wide range of production equipment
Principles of Engineering Economic Analysis, 5th edition
MACRS
GDS Property Classes
 3-year property: class life of 4 years or less, e.g.,
over-the-road-tractors, special tools for
manufacture of automobiles, etc.
 5-year property: class life between 4 and 10 yrs,
e.g.,
automobiles,
computers
& peripherals, office
SMP
machines:
5-year property
equipment, and general – purpose trucks
 7-year property: class life between 10 and 16 yrs,
Theme
park and
park in
property
without
classamusement
life, and not included
equipment:
7-year
property
27.5
– and 39-year
classes,
e.g., office furniture
and wide range of production equipment
Principles of Engineering Economic Analysis, 5th edition
MACRS
GDS Property Classes
 10-year property: class life of 16 or more and less
than 20 years, e.g., vessels, tugs
 15-year property: class life of 20 or more and less
than 25 years, e.g., sidewalks, roads
 20-year property: class life of 25 or more yrs other
than real property with a class life of 27.5 years or
more, plus municipal sewers, e.g. farm buildings
 27.5-year residential rental property
 39-year nonresidential real property: class life of
27.5 or more years and not residential rental
property
Principles of Engineering Economic Analysis, 5th edition
MACRS
In general, a half-year depreciation charge is allowed by
the IRS, regardless of when an asset is placed in service
or disposed of during the year. The exceptions are a)
27.5-Year and 39-Year property and b) when a midquarter convention applies. The latter applies to all
property, other than nonresidential real property and
residential rental property, if more than 40% of the
cumulative depreciation charges for property placed in
service and disposed of during a year occur during the
last three months of a tax year. In the examples and endof-chapter problems, we assume exception b) does not
occur. To be consistent with end-of-year cash flow
assumptions in previous chapters and assumptions
made by authors of other engineering economics texts,
we assume investments occur at the end of year zero
and the first, half-year, depreciation charge occurs at the
end of year one. We do so, realizing that in practice, the
half-year depreciation charges and investments
generally occur in the same tax year.
Principles of Engineering Economic Analysis, 5th edition
Computing MACRS Allowance
 For 3-, 5-, 7-, and 10-year classes. MACRS
allowances are determined by using double
declining balance and switching to straight line
depreciation at the optimum time with a half-year
convention (200% DBSLH)
 For 15- and 20-year classes, 150% DB with
switching to SLN depreciation at the optimum time
with a half-year convention is used (150% DBSLH)
 For 27.5- and 39-year class, SL with a mid-month
convention (SLM) is used
Principles of Engineering Economic Analysis, 5th edition
MACRS-GDS percentages for 3-, 5-, 7-, and 10-year property are 200% DBSLH and 15- and
20-year property are 150% DBSLH
EOY
3-Year
5-Year
7-Year
10-Year 15-Year 20-Year
Property Property Property Property Property Property
1
33.33
20.00
14.29
10.00
5.00
3.750
2
44.45
32.00
24.49
18.00
9.50
7.219
3
14.81
19.20
17.49
14.40
8.55
6.677
4
7.41
11.52
12.49
11.52
7.70
6.177
5
11.52
8.93
9.22
6.93
5.713
6
5.76
8.92
7.37
6.23
5.285
7
8.93
6.55
5.90
4.888
8
4.46
6.55
5.90
4.522
9
6.56
5.91
4.462
10
6.55
5.90
4.461
11
3.28
5.91
4.462
12
5.90
4.461
13
5.91
4.462
14
5.90
4.461
15
5.91
4.462
16
2.95
4.461
17
4.462
18
4.461
19
4.462
20
4.461
21
2.231
Principles of Engineering Economic Analysis, 5th edition
MACRS-GDS percentages for 27.5-year residential rental property using mid-month convention
Month in Tax Year Property Placed in Service
Year
1
2
3
4
5
6
7
8
9
10
11
1
3.485%
3.182%
2.879%
2.576%
2.273%
1.970%
1.667%
1.364%
1.061%
0.758%
0.455%
2-9
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
10-26* 3.637%
3.637%
3.637%
3.637%
3.637%
3.637%
3.637%
3.637%
3.637%
3.637%
3.637%
11-27** 3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
3.636%
28
1.970%
2.273%
2.258%
2.879%
3.182%
3.485%
3.636%
3.636%
3.636%
3.636%
3.636%
29
0.152%
0.455%
0.758%
1.061%
1.364%
MACRS-GDS percentages for 39-year nonresidential real property using mid-month convention
Month in Tax Year Property Placed in Service
Year
1
2
3
4
5
6
7
8
9
10
11
1
2.461%
2.247%
2.033%
1.819%
1.605%
1.391%
1.177%
0.963%
0.749%
0.535%
0.321%
2-39
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
40
0.107%
0.321%
0.535%
0.749%
0.963%
1.177%
1.391%
1.605%
1.819%
2.033%
2.247%
* even-numbered year
** odd-numbered year
Principles of Engineering Economic Analysis, 5th edition
12
0.152%
3.636%
3.637%
3.636%
3.636%
1.667%
12
0.107%
2.564%
2.461%
Computing MACRS Allowance
 Tables 9.4 and 9.5 can be used to calculate
the MACRS depreciation allowance
 Given the allowance, pt,
dt = ptP
Bt = P(1 - p1 - p2 - … - pt-1 - pt)
 The Excel® VDB worksheet function can be
used to calculate the MACRS depreciation
rates
 Example 9.6 illustrates the use of the Excel®
VDB worksheet function
Principles of Engineering Economic Analysis, 5th edition
From the text
5-Year Property:
Recall, VDB(cost,salvage,life,start_period,end_period,factor,no_switch)
Let cost = 1, salvage = 0, life = 5, and factor = 2.
For start_period = 0 and end_period = 0.5, =VDB(1,0,5,0,0.5,2) = 20%, which is
the beginning half-year rate.
For start_period = 0.5, end_period = 1.5, =VDB(1,0,5,0.5,1.5,2) = 32%.
For start_period = 1.5, end_period = 2.5, =VDB(1,0,5,1.5,2.5,2) = 19.2%.
For start_period = 2.5, end_period = 3.5, =VDB(1,0,5,2.5,3.5,2) = 11.52%.
For start_period = 3.5, end_period = 4.5, =VDB(1,0,5,3.5,4.5,2) = 11.52%.
For start_period = 4.5, end_period = 5, =VDB(1,0,5,4.5,5,2) = 5.76%, which is the
final half-year rate.
Principles of Engineering Economic Analysis, 5th edition
Example 9.7
The IRS classifies surface mount placement machines as
5-year equipment. What are the depreciation charges and
book values for a $500,000 SMP machine?
d1 = 0.20($500,000) = $100,000
d2 = 0.32($500,000) = $160,000
d3 = 0.192($500,000) = $96,000
d4 = 0.1152($500,000) = $57,600
d5 = 0.1152($500,000) = $57,600
d6 = 0.0576($500,000) = $28,800
B1 = $500,000 - $100,000 = $400,000
B2 = $400,000 - $160,000 = $240,000
B3 = $240,000 - $96,000 = $144,000
B4 = $144,000 - $57,600 = $86,400
B5 = $86,400 - $57,600 = $28,800
B6 = $28,800 - $28,800 = $0
Principles of Engineering Economic Analysis, 5th edition
Example 9.8
Compare SLN, DDB, and MACRS for the SMP
machine, assuming a negligible salvage value.
Consider SLH, 200%DBH, MACRS, SLN, DDB, and
DDB/SLN. Compute the present worth of the
depreciation allowances, based on a 10% MARR.
Which depreciation method maximizes the PW?
Principles of Engineering Economic Analysis, 5th edition
Depreciation Allowances for Example 9.8.
EOY
0
1
2
3
4
5
6
PW =
EOY
0
1
2
3
4
5
6
SLH
d
$50,000.00
$100,000.00
$100,000.00
$100,000.00
$100,000.00
$50,000.00
$361,847.83
B
$500,000.00
$450,000.00
$350,000.00
$250,000.00
$150,000.00
$50,000.00
$0.00
200%DBH
d
$100,000.00
$160,000.00
$96,000.00
$57,600.00
$34,560.00
$12,960.00
$363,382.91
B
$500,000.00
$400,000.00
$240,000.00
$144,000.00
$86,400.00
$51,840.00
$38,880.00
MACRS
d
$100,000.00
$160,000.00
$96,000.00
$57,600.00
$57,600.00
$28,800.00
$386,630.21
B
$500,000.00
$400,000.00
$240,000.00
$144,000.00
$86,400.00
$28,800.00
$0.00
SLN
d
$100,000.00
$100,000.00
$100,000.00
$100,000.00
$100,000.00
$0.00
$379,078.68
B
$500,000.00
$400,000.00
$300,000.00
$200,000.00
$100,000.00
$0.00
$0.00
Principles of Engineering Economic Analysis, 5th edition
DDB
d
$200,000.00
$120,000.00
$72,000.00
$43,200.00
$25,920.00
$0.00
$380,686.86
B
$500,000.00
$300,000.00
$180,000.00
$108,000.00
$64,800.00
$38,880.00
$38,880.00
DDB/SLN
d
$200,000.00
$120,000.00
$72,000.00
$54,000.00
$54,000.00
$0.00
$405,498.88
B
$500,000.00
$300,000.00
$180,000.00
$108,000.00
$54,000.00
$0.00
$0.00
SLH
SLN
200%DBH
DDB
MACRS
DDB/SLN
$500,000
Book Value
$400,000
$300,000
$200,000
$100,000
$0
0
1
2
3
End of Year
Principles of Engineering Economic Analysis, 5th edition
4
5
6
Sum of Years’ Digits (SYD) Depreciation
Let
P = cost basis
F = salvage value
n = recovery period
dt = depreciation allowance for year t
Bt = book value at the end of year t
dt = 2(n – t + 1)(P – F)/[n(n + 1)]
=SYD(cost,salvage,life,per)
Bt = F + (P – F)(n – t)(n – t + 1)/[n(n + 1)]
Principles of Engineering Economic Analysis, 5th edition
Example 9.A.1
Calculate the SYD depreciation allowances and
book values for the $500,000 surface mount
placement machine, including a useful life of 10
years and a salvage value of $50,000.
t
0
1
2
3
4
5
6
7
8
9
10
SYD
dt
$81,818.18
$73,636.36
$65,454.55
$57,272.73
$49,090.91
$40,909.09
$32,727.27
$24,545.45
$16,363.64
$8,181.82
Bt
$500,000.00
$418,181.82
$344,545.45
$279,090.91
$221,818.18
$172,727.27
$131,818.18
$99,090.91
$74,545.45
$58,181.82
$50,000.00
Principles of Engineering Economic Analysis, 5th edition
Pit Stop #9—Avoid the Pot Holes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
True or False: Straight-line depreciation is the most popular depreciation
method used in financial reporting.
True or False: The Modified Accelerated Cost Recovery System is the most
popular depreciation method used in computing corporate income tax
liabilities.
True or False: Based on maximizing the present worth of depreciation
allowances, MACRS is preferred to SLN for recovery periods greater than 5
years.
True or False: Accelerated depreciation plans were adopted after World War
II to stimulate capital investment.
True or False: Engineers seldom have an opportunity to influence the
recovery period for expenditures.
True or False: MACRS is equivalent to DDB, switching to SLN, with a midyear convention.
True or False: The most popular variation of MACRS is MACRS-ADS.
True or False: Sum-of-Years’-Digits depreciation is a popular depreciation
method and is most often used to compute income tax liabilities.
True or False: When given a choice of depreciation methods to use, choose
the one that maximizes the present worth of book value.
True or False: Sinking fund depreciation is the only depreciation method
described in the book that is based on the time value of money.
Principles of Engineering Economic Analysis, 5th edition
Pit Stop #9—Avoid the Pot Holes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
True or False: Straight-line depreciation is the most popular depreciation
method used in financial reporting. True
True or False: The Modified Accelerated Cost Recovery System is the most
popular depreciation method used in computing corporate income tax
liabilities. True
True or False: Based on maximizing the present worth of depreciation
allowances, MACRS is preferred to SLN for recovery periods greater than 5
years. True
True or False: Accelerated depreciation plans were adopted after World War
II to stimulate capital investment. True
True or False: Engineers seldom have an opportunity to influence the
recovery period for expenditures. False
True or False: MACRS is equivalent to DDB, switching to SLN, with a midyear convention. True
True or False: The most popular variation of MACRS is MACRS-ADS. False
True or False: Sum-of-Years’-Digits depreciation is a popular depreciation
method and is most often used to compute income tax liabilities. False
True or False: When given a choice of depreciation methods to use, choose
the one that maximizes the present worth of book value. False
True or False: Sinking fund depreciation is the only depreciation method
described in the book that is based on the time value of money. True
Principles of Engineering Economic Analysis, 5th edition