Chapter 11 Engineering Economic Straight Line Depreciation Problems Study chapter 11 presentation.Watch Example Problems Video 9 posted at the following li

Chapter 11 Engineering Economic Straight Line Depreciation Problems Study chapter 11 presentation.Watch Example Problems Video 9 posted at the following link. Engineering Economic Analysis
Chapter 11
Depreciation
11-1
Chapter Outline
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Income, Depreciation, Cash Flow, & Valuation
Basic Aspects of Depreciation
Time and Value Based Depreciation
Depreciation for Taxes – Bonus Depreciation
Depreciation for Taxes – MACRS Depreciation
Depreciation for Taxes – Bonus Plus MACRS
Comparing Depreciation Methods
Unit-of-Production Depreciation
Depletion
Spreadsheet Functions for Depreciation
11-2
Learning Objectives
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Distinguish between depreciation & cash flows; between
depreciation for taxes and for valuation
Understand types of depreciable property
Use classic methods to calculate annual depreciation
charge & book value
Account for capital gains/losses, ordinary losses, &
depreciation recapture due to asset disposal
Use bonus depreciation & MACRS, separately and
together
Compare commonly used depreciation methods
Use unit-of-production & depletion methods
Use spreadsheets to calculate depreciation
11-3
Vignette: Depreciation &
Intangible Property
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Firms depreciate tangible
property—forklifts, computers,
buildings—as expenses that
reduce taxable income
Purchased intangible assets can be amortized over time
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Patents, copyrights, licenses, non-compete agreements
Goodwill ≡ firm’s value over value of its assets
Intangible property ~80% of total market value of
“typical” U.S. firm
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Nike, Coke, … brands
Patent lawsuits between tech firms such as Apple & Samsung
11-4
Vignette: Depreciation &
Intangible Property
1. Other examples of legal battles over intangible
assets are _______?
2. If you had to develop a method to amortize a
patent, how would you do this? What parameters
must you consider?
3. Does % of U.S. firm market value tied to intangible
assets surprise you? Why or why not? Is % likely
to differ in other countries? Why or why not?
11-5
Depreciation & Expenses
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Expenses: subtract from revenues as they
occur
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Labor
Utilities
Materials, etc.
Capital:
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Usually expensed over a period of time
Method = depreciation
11-6
Income Statement
Revenue
Revenue
Costs
35
Sales of products & services
$184
Cost of Goods Sold
Wages, materials, Utilities
Depreciation
Selling, Admin., Financing
Total Costs
$164
Net Income Before Taxes
Taxes
Profit
Total
110
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20
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11-7
Valuation & Taxes
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GAAP allows 4 methods for valuation
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Straight-line
Declining Balance
Units of Production
Sum-of-Years’ Digits
Federal & State governments set tax law
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Bonus depreciation
MACRS
Bonus plus MACRS
Others (by States)
Federa
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11-8
Basic Aspects of Depreciation
Definitions
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Decline in asset’s market value due to
deterioration or obsolescence
Decline in asset’s value to owner
Systematic allocation of asset’s cost over its
depreciable life (accountant’s & tax agency’s
definition)
Depreciation may be calculated using method
for taxes, another method for valuation
11-9
Depreciation & Expenses
Expenses:
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Part of regular business operations
“Consumed” over short period of time
Sometimes recurring
Do not lose value gradually over time
Subtracted from business revenues as they occur
Reduce taxable income & taxes
Examples: labor, utilities, materials, insurance, …
11-10
Depreciation & Expenses
Depreciation:
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Capital asset costs depreciated over time, not
expensed as occur
Capital assets lose value gradually over time
Over depreciable life or recovery period
Each year’s depreciation charge reduces taxable
income & taxes that year
Non-cash accounting entry
Examples: buildings, vehicles, machines, …
11-11
Basic Requirements for Depreciation
Property depreciable if:
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Used for business purposes to produce income
Useful life is longer than one year
Asset decays, gets used up, wears out, becomes
obsolete, or loses value from natural causes
Only property owner may claim depreciation
expenses
Not if:
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Land, inventory
Leased rather than owned
Only business % if business & personal use
11-12
Example 11-1 Expensed or
Depreciated
Cost Item
Type of Cost
Why
Pizza dough & toppings
Expensed
Life
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