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ENGR 3360U Winter 2014

Unit 11

Cash Flow and Depreciation

Dr. J. Michael Bennett, P. Eng., PMP,

UOIT,

Version 2014-I-01

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Unit 11 Cash Flow and Depreciation

Change Record

2014!01 !nitial Creation

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Course Outline

& 0 $acro$icro Eco& 2 Eng Esti'ation

& 34 !nterest and E()i*alence

& + ,resent Worth

& 6 -nn)al Cash Flow& . Rate o/ Ret)rn

& Choosing the %est -lternati*e

& ther -nalses

& 10 Ris and Uncertaint

11 Depreciation 12 -/ter5a Cash Flow

13 Replace'ent -nalsis

14 !n/lation

1+ $-RR 7election 16 ,)8lic 7ector !ss)es

1. -cco)nting

1 %)siness ,lans

1 7)''ar

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Unit 11 Road $ap

& 11"1 !nco'e and Depreciation& 11"2 5pes o/ deprecia8le propert

& 11"3 Depreciation 'ethods

& 11"4 Capital Cost -llowance

& 11"+ Nat)ral Reso)rce -llowances

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11"1 !nco'e

& 5he 'eas)re o/ a 8)siness9s s)ccess is its ann)al pro/it or loss"

& $ore si'pl:

!nco'e ; Re*en)e < Costs to o8tain re*en)e& Re*en)e is 'one co'ing in and costs are 'one

going o)t to o8tain the reso)rces to generate re*en)e"

& 5here is= howe*er= a gro)p o/ ite's called phsicalassets which are o8tained and tpicall lose *al)e

o*er ti'e"

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Depreciation

& De/ined as: three distinct possi8ilities?:

1? Decline in 'aret *al)e

2? Decline in *al)e to an owner 3? 7ste'atic allocation o/ the cost o/ an asset o*er its

deprecia8le li/e >acco)ntant9s de/inition?

& - 'achine 'a decrease in *al)e 8eca)se it is

deteriorating or wearing o)t"& Depreciation is also ca)sed 8 o8solescence"

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Depreciation *ers)s Epenses

& Epenses are cons)'ed o*er the nor'alco)rse o/ 8)siness and o*er a short period o/ti'e"

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Depreciation

& Depreciation is a noncash cost >no act)al echange o/dollars?"

& Depreciation is a wa to clai' 8)siness epenses o*erti'e"

& 5o 8e deprecia8le= assets ')st:

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11"2 5pes o/ ,ropert

& 5angi8le ,ropert

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Depreciation

& Eceptions to depreciation: ne*er wears o)t?

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11"3 Depreciation $ethods

& %oo al)eBook value = Cost basis – Depreciation charges made to date

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Depreciation $ethods

& 7traight @ine Depreciation-nn)al depreciation charge ; d1;>%7?N % ; cost 8asis= 7 ; sal*age *al)e= N ; deprecia8le li/e

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Ea'ple

Cost o/ asset 00

@i/e + ears

7al*age .0

-nn)al dep ; >00.0?+ ; 166

al)e ; 00 166?

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7traight @ine

1 d1 ; >00.0?+ ; 166 % ; 00166;.34

2 d2 ; 2>00.0?+ ; 332 % ; 00332;+6

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& 7)'o/earsDigits Depreciation

& dt= depreciation charge in any year t

& N = number of years in depreciable life

& SOYD = sum of years digits! N"N#$%&'

& N=(! SOYD = $#'#)#*#( = $(

& B = cost of the asset made ready for use

& S = estimated salvage value

d$ = ""(+$#$%&$(%",--+.-% = '..

d' = ""(+'#$%&$(%",--+.-% = ''$

d) = ""(+)#$%&$(%",--+.-% = $//

d* = ""(+*#$%&$(%",--+.-% = $$$

d( = ""(+(#$%&$(%",--+.-% = -((

?>1

S BSOYD

t N d

t −+−

=

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& Declining %alance DH?

1D?n1;D%n1

& Do)8le Declining %alance

dt;>2N?>%oo *al)et1?

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Declining %alance >D;30H?

1 d1 ; 00>"30? ; 2.0 % ; 002.0 ; 630

2 d2 ; 630>"30? ; 1 % ; 004+ ; 441

3 d3

; 441>"30? ;132 % ; 00+1 ; 30

4 d4 ; 30>"30? ;2". % ; 0063". ; 216"3

+ d+ ;216"3>"30? ;6+ % ; 00.4 ; 1+1

Note: does not depreciate eno)gh" ReadI)st

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Declining %alance >D;40H?

1 d1 ; 00>"40? ; 360 % ; 00360 ; 340

2 d2 ; 340>"40? ; 216 % ; 00+.6 ; 324

3 d3

; 324>"40? ;130 % ; 00.06 ; 14

4 d4 ; 14>"40? ; . % ; 00.4 ; 116

+ d+ ; 116>"40? ;46 % ; 0030 ; .0

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U i 11 C h Fl d D i i

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Do)8le Declining >twice linear?

1 d1 ; >00.0?>2+?;332 %;>00.0?332 ;4

2 d2 ; >4?>2+? ; 1 % ; 30+31 ; 2

3 d3 ; >2?>2+? ; 120 % ; 306+1 ; 1.

4 d4 ; >1.?>2+? ; .2 % ; 30.23 ; 10.

+ d+ ; >10.?>2+? ; 43 % ; 30.66 ; 64

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U i 11 C h Fl d D i i

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& Unito/,rod)ction Depreciation %

7?

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U it 11 C h Fl d D i ti

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Ea'ple

%;00 7;.0

ear 1 4J 2 J 3 16J 4 J + 4J ; 40J

Dep 1 ; >00.0?K4J40J ; 3

Dep 2 ; 166

Dep 3 ; 332

Dep 4 ; 166Dep + ; 3

5otal ; 30

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Capital Cost -llowance

& Canada has legislation on how assets aredepreciated"

& 5here are di//erent rates /or di//erent tpes o/

assets"

& 5he 'ai')' capital cost allowance aco'pan can tae in one ear is what wo)ld 8e

s)//icient to red)ce taa8le inco'e to Lero"& Generall= onl +0H o/ a gi*en rate is allowed

in the /irst ear o/ depreciation"

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1123 2014!01

5pical CC- Rates and Classes

0 ,ropert not incl)ded in na'ed classes 20H0 -ircra/t= incl)ding their /)rnit)re and spare parts 2+H

10 -)to'o8iles= personal co'p)ters= sste's so/tware 30H

12 Chinaware= )ni/or's= dies= co'p)ter so/tware 100H

4+ General p)rpose co'p)ters 4+H

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1124 2014!01Dr"

Calc)lations

7traight/orward

CC- is an optional ta ded)ction

%ased on the UCC that ear

@and cannot 8e depreciated

+0H r)le applies

!/ the ta ear is not a /)ll ear= prorate


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112+ 2014!01Dr"

Ea'ple

n #an)ar 1= shawa %earing 7er*ices p)rchases a 'achine /or 100=000

8elonging to Class >20H?" Deter'ine the

depreciation sched)le /or the /irst 3 ears"CC- UCC

Dec 31= ear 1 10000 0000

Dec 31= ear 2 1000 .2000

Dec 31= ear 3 14400 +.600


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1126 2014!01Dr"

Recapt)re

!/ when the propert is sold= the UCC isnegati*e= too ')ch has 8een depreciated"

5a 'an co'ethM Will claw8ac the

ecess"


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112. 2014!01Dr"

Ea'ple contin)ed

shawa %earing 8)s a second 'achine in ear 4 /or1+0=000" !n ear 6= it sells the /irst /or 60=000"

Net ear it sells the second 'achine /or

100=000" Do the ta calc)lations"


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112 2014!01Dr"

Ea'ple contin)ed

CC- UCC

Dec 31= ear 1 100000 0000

Dec 31= ear 2 1000 .2000

Dec 31= ear 3 14400 +.600Dec 31= ear 4 1+0000 11+201+000 1100

Dec 31= ear + > 60000?

24216 664

Dec 31= ear 6 100000 3136

Recapt)re 3136


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Depreciation and -sset Disposal

& 5aesowed changes 8ased on di//erent/actors with respect to disposal:

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Depreciation and -sset Disposal= cont9d"

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Depreciation and -sset Disposal= cont9d"

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11"+ Nat)ral Reso)rces -llowances

& Depletion

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Depletion $ethods

Depreciation is applied toassets that can 8e

replaced"

Depletion applies to

reso)rces that are noteasil replaced= lie:

5i'8er=

$ineral deposits=

il and gas=etc"

Cost Depletion Also called factor depletion Based upon the level of activity

or usage; Time is not involved.

Percentage DepletionApplies a constant, stated percentage

of the resource's gross incomeprovided it does not exceed !" ofthe #rm$s current taxa%le income.

/irst cost

reso)rce capacit3

cos depletion /actor /or 3ear t

t

t

p

p t

=

=


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1134 2014!01Dr" #"$" %ennett ENGR 3360

Depletion: Cost Depletion

First= the cost 8asis o/ the reso)rceis deter'ined < /irst cost orin*est'ent cost"

7econd < one ')st esti'ate thea'o)nt o/ the reso)rce that isa*aila8le /or etraction"

5er'ed: Resource Capacity.

!t is an esti'ated *al)e since it isi'possi8le to predict eactl thetr)e reso)rce capacitM

5hen= cost depletion /actor pt /or

ear t is calc)lated P

&et t denote the year

pt denotes the

depletion factor for

year t

Then, pt is de#ned as

Percentage depletion amount =

Percentage x gross income from

property

initial cost

reso)rce capacit

t p =


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Depletion: !'portant !ss)e

$aIor ,oint /or depletion:

5here ')st 8e a reasona8le esti'ate o/ the

a'o)nt o/ the reso)rce that is 8eing etracted"

For /ir's engaged in etraction acti*ities

the process o/ reso)rce esti'ation is an

i'portant acti*it and re()ires epert

analsis"


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,ercentage Depletion

- constant stated percentage o/ the reso)rces gross

inco'e 'a 8e depleted each ear so long as:

5he calc)lated depletion a'o)nt does not eceed +0H o/ the

/ir'9s taa8le inco'e

-llowa8le depletions rates are p)8lished 8 CR-


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Ea'ple

$ac$illan%loedel has negotiated the rights to c)t ti'8er on an acreage/or .00=000" -n esti'ated 3+0 'illion 8oard /eet o/ l)'8er are

har*esta8le"

a? Deter'ine the depletion allowance /or the /irst 2 ears= i/ 1+ 'illionand 22 'illion 8oard /eet are re'o*ed"

8? -/ter 2 ears= the total reco*era8le 8oard /eet was reesti'ated to 8e4+0 'illion /ro' the ti'e the rights were /irst p)rchased" Co'p)te

the new cost depletion /actor /or ears 3 and later"


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p

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7ol)tion

a) pt ; .000003+0 ; 2000 per 'illion %F" 5h)s /irst ear depletion is2000>1+000000? ; 30000"

8? -/ter 2 ears= .4000 has 8een re'o*e" al)e is now 626000" Newesti'ate is 4+01122 ; 41+" 5here/ore

pt ; 62600041+ ; 1+16 per $%F


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p

7)''ar

& Depreciation: Epense o/ an asset that iscalc)lated o*er the deprecia8le li/e o/ theasset"

& 5here are a n)'8er o/ tpes o/ deprecia8leassets"& 5here are also a n)'8er o/ depreciation

'ethods"

& !n Canada= legislation pro*ides the r)les /ordepreciation o/ assets" Called:

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p

7)''ar= cont9d"

& Disposedo/ assets 'ight not 8e disposedo/ at the B8oo *al)e9 o/ an asset"

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