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  • Inflation and Depreciation: - Depreciation Is An Important Element in Finding After-Tax Cash Flows

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    The document discusses the Modified Accelerated Cost Recovery System (MACRS), the principal method for computing depreciation for property in engineering projects. MACRS applies to most tangible depreciable property placed in service after 1986. It consists of the General Depreciation System (GDS) and Alternative Depreciation System (ADS). Key information needed to calculate MACRS depreciation includes the cost basis, date placed in service, property class/recovery period, and depreciation method (GDS or ADS).

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    The document discusses the Modified Accelerated Cost Recovery System (MACRS), the principal method for computing depreciation for property in engineering projects. MACRS applies to most tangible depreciable property placed in service after 1986. It consists of the General Depreciation System (GDS) and Alternative Depreciation System (ADS). Key information needed to calculate MACRS depreciation includes the cost basis, date placed in service, property class/recovery period, and depreciation method (GDS or ADS).

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    3 views76 pages

    Inflation and Depreciation: - Depreciation Is An Important Element in Finding After-Tax Cash Flows

    Uploaded by

    Alaa Telfah
    The document discusses the Modified Accelerated Cost Recovery System (MACRS), the principal method for computing depreciation for property in engineering projects. MACRS applies to most tangible depreciable property placed in service after 1986. It consists of the General Depreciation System (GDS) and Alternative Depreciation System (ADS). Key information needed to calculate MACRS depreciation includes the cost basis, date placed in service, property class/recovery period, and depreciation method (GDS or ADS).

    Copyright:

    © All Rights Reserved
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    Flag for inappropriate content
    of 76

    Chapter 4

    Inflation and Depreciation

    .
    Depreciation is an important element in finding after-tax
    cash flows.

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    The Modified Accelerated Cost Recovery System
    (MACRS)

    MACRS is the principle method for computing


    depreciation for property in engineering projects.

    Applies to most tangible depreciable property placed in


    service after December 31, 1986.

    SVN is defined to be 0.

    It consists of two systems:


    1. the General Depreciation System (GDS)
    2. the Alternative Depreciation
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    Information Needed to Calculate MACRS Depreciation

    1. The cost basis


    2. The date the property was placed in service
    3. The property class and recovery period
    4. The MACRS depreciation used (GDS or ADS)
    5. The time convention that applies (half year)

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    The property class
    and recovery period

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    Basic information of GDS:

    • Tangible depreciable property assigned to one of six personal


    property classes (3, 5, 7, 10, 15 and 20-year) -Corresponds to
    GDS recovery period.
    • Personal depreciable property not corresponding to these
    periods is considered 7-yr property class.
    • Real property ((6‫ابته‬666‫مالك ث‬6‫ ا‬assigned to two real property
    classes :
    nonresidential real property(6‫كنيه‬66‫)غير س‬
    residential rental property. (6‫لمؤجره‬66‫ ا‬6‫لسكنيه‬66‫)ا‬

    3. GDS recovery period is 39 years for nonresidential real


    property (31.5 years if in service before May 13, 1993)
    and 27.5 years for residential rental property.
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    Basic information of ADS:
    • ADS recovery period for tangible personal property is normally
    the same as the class life of the property, with some exceptions
    ( i.e., asset class 00.12 and 00.22 )

    • Any tangible personal property that does not fit into one of the
    asset classes is depreciated using a 12-year ADS recovery period.

    • ADS recovery period for nonresidential real property is 40 years.

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    Depreciation methods for MACRS:

    1. GDS 3, 5, 7, and 10 years personal property class: 200%


    declining balance (DB) with switchover to Straight Line (SL).
    2. GDS 15 and 20 years personal property class: 150% declining
    balance (DB) with switchover to Straight Line (SL).
    3. GDS nonresidential real property and residential rental
    property: the SL method over GDS recovery periods.
    4. ADS: the SL method for both personal and real property over
    the fixed ADS recovery periods.

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    Half-Year Time Conventions For MACRS Depreciation
    Calculations

    • All assets placed in service during the year are treated as if use
    began in the middle of the year (1/2-year depreciation is
    allowed).

    • If asset is disposed of before the full recovery period is used,


    only half of the normal depreciation deduction can be taken for
    that year.

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    Using MACRS is easy!

    1. Determine the asset’s recovery period (Table 7-2).


    2. Use the appropriate column from Table 7-3 that
    matches the recovery period to find the recovery
    rate, rk, and compute the depreciation for each year
    as

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