The capital investments of a corporation in tangible assets—equipment,
computers, vehicles, buildings, and machinery—are commonly recovered
on the books of the corporation through depreciation. Although the depreciation
amount is not an actual cash flow, the process of depreciating an
asset, also referred to as capital recovery, accounts for the decrease in an
asset’s value because of age, wear, and obsolescence. Even though an asset
may be in excellent working condition, the fact that it is worth less through
time is taken into account in economic evaluation studies. An introduction to
the classical depreciation methods is followed by a discussion of the Modi-
fied Accelerated Cost Recovery System (MACRS), which is the standard in
the United States for tax purposes. Other countries commonly use the classical
methods for tax computations.
Why is depreciation important to engineering economy? Depreciation is
a tax-allowed deduction included in tax calculations in virtually all industrialized
countries. Depreciation lowers income taxes via the relation
Taxes = (income - deductions)(tax rate)
Income taxes are discussed further in Chapter 17.
This chapter concludes with an introduction to two methods of depletion,
which are used to recover capital investments in deposits of natural resources
such as minerals, ores, and timber.
