Page 285 - Analysis, Synthesis and Design of Chemical Processes, Third Edition
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Most equipment in a chemical plant has a class life of 9.5 years [1] with no salvage value. This means
that the capital investment may be depreciated using a straight-line method over 9.5 years. Alternatively, a
MACRS method over a shorter period of time may be used, which is five years for this class life. In
general, it is better to depreciate an investment as soon as possible. This is because the more the
depreciation is in a given year, the less taxes paid. As shown earlier in this chapter, “money now is worth
more than the same amount in the future”; therefore, it is better to pay less in taxes at the beginning of a
project than at the end.
The MACRS method uses a double declining balance method and switches to a straight-line method when
the straight-line method yields a greater depreciation allowance for that year. The straight-line method is
applied to the remaining depreciable capital over the remaining time allowed for depreciation. The half-
year convention assumes that the equipment is bought midway through the first year for which
depreciation is allowed. In the first year, the depreciation is only half of that for a full year. Likewise in
the sixth (and last) year, the depreciation is again for one-half year. The depreciation schedule for
equipment with a 9.5-year class life and 5-year recovery period, using the MACRS method, is shown in
Table 9.2.
Table 9.2 Depreciation Schedule for MACRS Method for Equipment with a 9.5-Year Class Life and
a 5-Year Recovery Period [1]
Example 9.22 illustrates the method by which the MACRS depreciation allowances in Table 9.2 are
obtained.
Example 9.22
The basic approach is to use the double declining balance (DDB) method and compare the result with the
straight-line (SL) method for the remaining depreciable capital over the remaining period of time. The
MACRS method requires depreciation of the total FCI , without regard for the salvage value.
L
Calculations are given below, using a basis of $100:
