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ME 443

ME 443 . DEPRECIATION AND INCOME TAX CONSIDERATIONS Prof. Dr. Mustafa Gökler. INTRODUCTION.

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ME 443

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  1. ME 443 DEPRECIATION AND INCOME TAX CONSIDERATIONS Prof. Dr. Mustafa Gökler

  2. INTRODUCTION • Although depreciation allowances are not cash flows, their magnitudes and timing do affect taxes. Taxes are cash flows and therefore it is necessary to include them in a through economic analysis, just as costs of urges, equipment, materials, and energy are included.

  3. MEANING of DEPRECIATION • Most property decreases in value with use and time. That is, it depreciates. In determining taxable income, the law permits deduction of a reasonable allowance for wear and tear, natural decay or decline, exhaustion or obsolescence of properly.

  4. Straight-Line Depreciation • The Straight-Line Depreciation Method provides for Uniform write-off of an asset (Uniform depreciation)

  5. Straight-Line Depreciation P: Original cost F: Value at the end of the life of the asset Dt: Annual cost of depreciation in the nth year n: Deprecible life of the asset in years

  6. Straight-Line Depreciation The unrecovered investment at the end of the year t (Book Value)

  7. EXAMPLE If a computer system is bought at a price of $ 82 000 if the salvage value $ is 5000, and useful life of 7 years. What is the depreciation?

  8. Declining Balance Depreciation In this method, the depreciation allowed at the end of each year t is a constant fraction (p) of the unrecovered investment at the end of the previous year, B t-1 Dt = p B t-1 Bt = P (1 – p) t Dt = p P(1-p) t-1

  9. EXAMPLE P = 100.000.000 TL p = 50 % n = 4 years D1 = 100 MTL (0.5) = 50 MTL B1 = 100 - 50 = 50 MTL D2 = 50 MTL (0.5) = 25 MTL B2 = 50 - 25 = 25 MTL D3 = 25 MTL (0.5) = 12.5 MTL B3 =25–12.5 = 12.5 MTL D4 = 12.5 MTL B4 = 0

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