In this lesson, we've learned how to calculate Before-Tax Cash Flow and After-Tax Cash Flow. Also, we learned about investments that can be expensed in the year of occurrence in full amount or capitalized over more than one year.
Tax law allows the company to deduct the depreciated value of the asset from the generated income. There are permitted methods (will be explained later in this lesson) to calculate the depreciated value and tax allowance. The most common methods include Straight Line, Declining Balance, Declining Balance Switching to Straight Line, and Accelerated Cost Recovery System (ACRS).
The Straight Line Depreciation method is the simplest way of calculating depreciation. In this method, depreciation is constant and equally distributed over the allowable lifetime of the property. But the biggest problem with this method is that Straight Line depreciation is very slow, and capital cost is recovered slowly.
The Declining Balance Depreciation method calculates depreciation based on constant rate. In this method, a constant declining rate is multiplied by Adjusted Basis to calculate each year’s depreciation. And the Adjusted Basis equals residual book value of the asset (cost - cumulative depreciation previously taken).
Modified Accelerated Cost Recovery Systems (MACRS) is a popular method in the United States to recover the cost of most intangible depreciable assets. MACRS depreciation methods for personal property include 200% and 150% declining balance switching to straight line.
Reminder - Complete all of the Lesson 7 tasks!
You have reached the end of Lesson 7! Double-check the to-do list on the Lesson 7 Overview page to make sure you have completed all of the activities listed there before you begin Lesson 8.