Hello Dony,
I think your confusion comes from the fact that your question compounds the issue of calculating depreciation with the issue of equipment replacement decisions in investment analysis. Let me try to answer each of your questions:
1. How to calculate Depreciation base using Strait line method and MACRS method.
General depreciation rules are:
Straight line depreciation = (Original cost - salvage) / useful life in years.
MACRS depreciation = Original cost x MACRS percentage, based on MACRS tax life and specific year for depreciation.
2. If salvage value of old and new asset given how we will treat those amounts in calculation of depreciation
In investment decisions the salvage value of the old asset usually has two values given: (1) at the current time when we are considering replacing the asset, and (2) at the end of the old asset's full useful life. So, for example, an asset we own has a 10 year useful life, but we have now had it for 4 years and are considering replacing it. There is the value now, at 4 years old, and the value at the end of 10 years.
In depreciation calculations, use only the salvage value at the end of the 10 years.
In your Investment analysis, the value now, at four years old, is considered a cash inflow to help offset the cost of the new replacement equipment.
At the end of the 10th year, when you would have had the salvage value of the old equipment (had you kept it), you now are getting the salvage value of the new equipment instead. So at the end of the 10th year, the cash inflow from the new equipment investment decision is the differential salvage value from the new equipment. If the new equipment's salvage value is greater than the old, it is a cash inflow. If the new equipment's salvage value is lower, it is treated as a negative (reduced cash inflow).
3.I notices in wiley ,they not deduct slvage value of old asset from new asset asset in MACRS depreciation base calculation.what is the reason for that.
MACRS depreciation base never considers the salvage value in the depreciation calculations. This is based on the tax rules. However, if the item is later sold for some value, the full amount of the sales price is a taxable gain.
4. And same case they didnt take old asset salvage value also.
Same - tax rule.
5. How we take salvage value of new and old asset calculating operating cash flow. Is there any spacial case when we use these these depreciation methods.
First, follow the problem if it states to use straight line or MACRS! If there are no taxes in the problem, the basics for salvage values given in (2) answer the question. Depreciation itself is ignored.
When taxes are involved, you must modify the problem to consider:
(a) Tax savings on the annual incremental depreciation: Calculate the depreciation for the new equipment each year, and the old equipment each year. The incremental amount is then multiplied by the effective tax rate to get the tax savings (positive to cash inflow, assuming the new equipment's depreciation is higher).
(b) Tax on the gain on sale of the old equipment at the start of the investment in the new equipment: Compare the selling price for the old equipment to the carrying value at the investment date to determine a gain or loss. Then multiply the gain or loss by the effective tax rate. Tax on the gain is a cash outflow and tax savings on the loss is a cash inflow. This process is appropriate for both MACRS and straight line.
(c) Tax on the gain or loss on the salvage value at the end of the investment: If you are using MACRS, the incremental salvage value is the taxable gain, since book values should be zero. Multiply the incremental salvage value by the tax rate. If you are using straight line depreciation, the 'book values' of the equipment (old and new) should be equal to their salvage value, so there won't be any taxable gain or loss.
Good luck! Keep on studying!
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Jeanne David
Academic
University of Detroit Mercy
Farmington Hills MI
United States
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Original Message:
Sent: 01-01-2019 01:07 PM
From: Dony Francis
Subject: Depreciation calculation and salvage value
Hi all...my name is Dony Francis....im new here...i have some doubts from Part2 investment decisions. I search in different sources but didnt get exact solution...if any one knows about this please help me. Following are my doubts.
1. How to calculate Depreciation base using Strait line method and MACRS method.
2. If salvage value of old and new asset given how we will treat those amounts in calculation of depreciation
3.I notices in wiley ,they not deduct slvage value of old asset from new asset asset in MACRS depreciation base calculation.what is the reason for that.
4. And same case they didnt take old asset salvage value also.
5. How we take salvage value of new and old asset calculating operating cash flow. Is there any spacial case when we use these these depreciation methods.
If anyone help me to clarify these doubts it will be a great support for me and my friends doing cma.
Thank you
Dony Francis
India
Kerala
Ph.091-9846311143
<maskemail>Mail-donyfrancis@...</maskemail>
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Dony Francis
Student
Erumely
India
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