Академический Документы
Профессиональный Документы
Культура Документы
Unit 11
Cash Flow and Depreciation
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01
Change Record
2014-I-01 Initial Creation
11-2
2014-I-01
Course Outline
11-3
0 Macro-Micro Eco
2 Eng Estimation
3-4 Interest and Equivalence
5 Present Worth
6 Annual Cash Flow
7 Rate of Return
8 Choosing the Best Alternative
9 Other Analyses
10 Risk and Uncertainty
2014-I-01
11 Depreciation
12 After-Tax Cash Flow
13 Replacement Analysis
14 Inflation
15 MARR Selection
16 Public Sector Issues
17 Accounting
18 Business Plans
19 Summary
11-4
2014-I-01
11.1 Income
The measure of a businesss success is its annual
profit or loss.
More simply:
Income = Revenue Costs to obtain revenue
2014-I-01
Depreciation
Defined as:
11-6
2014-I-01
11-7
2014-I-01
Depreciation
Depreciation is a non-cash cost (no actual exchange of
dollars).
Depreciation is a way to claim business expenses over
time.
To be depreciable, assets must:
11-8
2014-I-01
Real Property
Personal Property
Intangible Property
11-9
2014-I-01
Depreciation
Exceptions to depreciation:
Cost Basis
11-10
2014-I-01
11-11
2014-I-01
Depreciation Methods
Straight Line Depreciation
Annual depreciation charge = d1=(B-S)/N
11-12
2014-I-01
Example
Cost of asset $900
Life
5 years
Salvage
$70
Annual dep = (900-70)/5 = 166
Value = 900 n(166)
11-13
2014-I-01
Straight Line
1 d1 = (900-70)/5 = 166 BV = 900-166=734
2 d2 = 2(900-70)/5 = 332 BV = 900-332=568
11-14
2014-I-01
Depreciation Methods
Sum-of-Years-Digits Depreciation
N t 1
dt
(B S )
SOYD
d2 = ((5-2+1)/15)(900-70) = 221
d3 = ((5-3+1)/15)(900-70) = 166
d4 = ((5-4+1)/15)(900-70) = 111
d5 = ((5-5+1)/15)(900-70) = 055
0.1-15
2014-I-01
Depreciation Methods
Declining Balance
11-16
2014-I-01
11-17
2014-I-01
11-18
2014-I-01
11-19
2014-I-01
Depreciation Methods
Unit-of-Production Depreciation
11-20
2014-I-01
Example
B=900 S=70
Year 1 4K 2 8K 3 16K 4 8K 5 4K = 40K
Dep 1 = (900-70)*4K/40K = 83
Dep 2 = 166
Dep 3 = 332
Dep 4 = 166
Dep 5 = 83
Total = 830
11-21
2014-I-01
2014-I-01
11-23
20%
25%
30%
100%
45%
Calculations
Straight-forward
CCA is an optional tax deduction
Based on the UCC that year
Land cannot be depreciated
50% rule applies
If the tax year is not a full year, pro-rate
Dr.
11-24
2014-I-01
Example
On January 1, Oshawa Bearing Services
purchases a machine for $100,000
belonging to Class 8 (20%). Determine the
depreciation schedule for the first 3 years.
Dec 31, year 1
Dec 31, year 2
Dec 31, year 3
Dr.
11-25
CCA
10000
18000
14400
UCC
90000
72000
57600
2014-I-01
Recapture
If when the property is sold, the UCC is
negative, too much has been depreciated.
Tax man cometh! Will claw-back the
excess.
Dr.
11-26
2014-I-01
Example continued
Oshawa Bearing buys a second machine in Year 4 for
$150,000. In Year 6, it sells the first for $60,000.
Next year it sells the second machine for
$100,000. Do the tax calculations.
Dr.
11-27
2014-I-01
Example continued
Dec 31, year 1
Dec 31, year 2
Dec 31, year 3
Dec 31, year 4
Dec 31, year 5
Dec 31, year 6
Recapture
Dr.
11-28
CCA
100000
18000
14400
150000 11520+15000
( -60000)
24216
-100000
UCC
90000
72000
57600
181080
96864
-3136
-3136
2014-I-01
Recaptured CCA
11-29
2014-I-01
Loss on disposal
11-30
2014-I-01
Capital Gains
11-31
2014-I-01
Percentage Depletion
Cost Depletion
11-32
2014-I-01
Property cost
Estimated number of recoverable units
Salvage value of the property
Depletion Methods
Depreciation is applied to
assets that can be
replaced.
Depletion applies to
resources that are not
easily replaced, like:
Timber,
Mineral deposits,
Oil and gas,
etc.
11-33
Cost Depletion
first cost
pt
resource capacity
pt cos t depletion factor for year t
Percentage Depletion
Applies a constant, stated percentage
of the resource's gross income
provided it does not exceed 50% of
the firms current taxable income.
2014-I-01
initial cost
pt
resource capacity
Percentage depletion amount =
Percentage x gross income from
property
11-34
2014-I-01
11-35
2014-I-01
Percentage Depletion
A constant stated percentage of the resources gross
income may be depleted each year so long as:
The calculated depletion amount does not exceed 50% of the
firms taxable income
Allowable depletions rates are published by CRA
11-36
2014-I-01
Example
MacMillan-Bloedel has negotiated the rights to cut timber on an acreage
for $700,000. An estimated 350 million board feet of lumber are
harvestable.
a) Determine the depletion allowance for the first 2 years, if 15 million
and 22 million board feet are removed.
b) After 2 years, the total recoverable board feet was re-estimated to be
450 million from the time the rights were first purchased. Compute
the new cost depletion factor for years 3 and later.
11-37
2014-I-01
Solution
a)
b)
11-38
2014-I-01
Summary
Depreciation: Expense of an asset that is
11-39
2014-I-01
Summary, contd.
Disposed-of assets might not be disposed
of at the book value of an asset.
2014-I-01