Taxes and Depreciation. MACRS. Review. What is Depreciation? Decline in value due to wear and tear (deterioration), obsolescence and lower resale value. Why do we compute depreciation? To reduce net profit before taxes =>Decrease taxes =>Increase the cash flow after taxes. Review (cont’d).
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The half-year convention assumes that an asset purchased in a year is purchased in the middle of the year. Therefore, only half a year of depreciation is allowed.Half-Year Convention
At the end of period 5, Book Value= 0 a year is purchased in the middle of the year. Therefore, only half a year of depreciation is allowed.Example 1 with MACRS 3-year
= -11000 + 3000 (P/A, 0.09, 5) + 1000 (P/F, 0.09, 5)
= -11000 + 3266.52 (P/F, 0.09, 1) + 3755.8 (P/F, 0.09, 2)
+ … + (1800+600) (P/F, 0.09, 5)