W14_Anton_Depreciation


W14_Anton_Depreciation

1. Problem Recognition, Definition, and Evaluation

On 2006 MPV car series 307 SW from Peugeot sold with price Rp. 498.000.000. on 2013 it sold on Rp. 200.000.000.

What method to calculate depreciation?

2. Development of the Feasible Alternative

Method available for depreciation:

– Straight line (SL) Method

– Decline balancing (DB)

– The Modified Accelerated Cost Recovery System (MACRS)

3. Development of the Outcomes and Cash flows for Each Alternative

Refer to information on poin 1 and table MACRS Class Lives and Recovery Periods:

Market Value on 2013 Rp. 200.000.000

1

2

3

4
Switch over from DB to SL on 6th EOY

5

6

4. Selection of Criterion (or Criteria)

Methods, time convention and recovery rate for calculating the depreciation under MACRS are applied in US, for others country need to follow each government regulation.

5. Analysis and Comparison of the Alternative

All of the methods to calculate depreciation above were time base, to calculate depreciation is also possible using unit of production for subject with decreasing value in a function of use.

6. Selection of the Preferred Alternative

Refer to Sullivan (2012): “Depreciation method that larger PWs (of depreciation amounts) are preferred by a firm that want to reduce the present worth of its income taxes paid to the government” (pp. 304)

7. Performance Monitoring and Post Evaluation of Result

Large depreciation amount was preferred method for the 1st owner and also good for buyer of the 2nd hand car, they will only paid small amount of depreciation.

8. References :

1. Sullivan W.G., Wicks E.M., Koelling C.P, (2012), Engineering Economics pp. 292 – 308, 15th edition, Prentice Hall.

2. Scott, Dr. Amos, PE (2012). Skills and knowlage of Cost Engineering, pp10.14 – 10.22, 5th edition, AACE International, Createspace.

3. Otosia.com (2012), Bursa Mobil Bekas. Retrieved from: http://mobil.kapanlagi.com/peugeot_307_sw_a_t_b_1991_ow.html

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1 Response to W14_Anton_Depreciation

  1. drpdg says:

    I liked your analysis and you did a very good job on it, demonstrating that you understood how to calculate depreciation using the different methods, which is the primary objective.

    My only concern with the case study you chose is by applying it to your personal auto, you really weren’t able to demonstrate the tax advantages of one method over another. Not a fatal flaw but the difference between 4 stars and 5 stars.

    Where this question becomes interesting in our business (oil, gas, mining and general construction) is when do we expect to see the revenue stream peak? If the revenue stream (and with it, profits) peaks early and then we will gain the most benefit by taking the accelerated methods. However if the revenue stream does NOT peak early, but builds gradually over the course of 3-5 or more years (as often happens in the mining sector) it may be worth it to NOT use any accelerated method as the revenues/profits do NOT come in the early years but in later years.

    Another variable- supposing tax rates are expected to INCREASE in the coming few years? Are you better off to take accelerated depreciation NOW with the lower tax rates or is the company better off to defer the benefits of depreciation until the tax rates have increased?

    Bottom line, while there is nothing wrong with what you posted here, there is a lot more you could have done with this had you chosen a different case study. My reason behind raising these issues is this is the kind of question you are likely to see for the narrative portion of your CEP or DRMP.

    BR,
    Dr. PDG, Jakarta

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