DDB(cost, salvage, life, period, factor)

where cost is the initial cost of the asset, salvage is the asset’s value at the end of the depreciation, life is the number of periods over which the asset is being depreciated, period is the number of the period (e.g., the year if life is measured in years, or the quarter if life is measured in quarters) for which the depreciation is to be calculated, and factor is the rate at which the balance declines. The value of factor is 2 for double- declining balance and 1.5 for 150%-declining balance. If a value is omitted for factor in the command, it is assumed to be 2.

Example 11.3: Solve Example 11.1 with double-declining balance depreciation rather than straight-line. Solution: Figure 11-3 is a spreadsheet solution obtained by using the DDB command. Note that the book

value has been depreciated to the salvage value at the end of the fourth year and there has been no further depreciation during the fifth year. This is because 40 percent of the book value of $16,200 at the end of three years equals $6480, which would have resulted in a book value of $9700 at the end of the fourth year, which is less than the salvage value of $10,000.

Figure฀11-3

Double-Declining Balance Depreciation (without adjustment for salvage value)

1 Example 11-3: DOUBLE-DECLINING BALANCE DEPRECIATION

2 Asset cost

3 Salvage value

4 Life, years

5 Depreciation Schedule

Year

7 1 2 3 4 5 8 Book value, beginning of year

16,200 $ 10,000 9 Annual depreciation

6,200 $ - 10 Book value, end of year

10,000 $ 10,000 11 Accumulated depreciation

Key Cell Entries

B8: =B2 C8: =B10, copy to D8:F8 B9: =DDB($B2,$B3,$B4,B7,2), copy to C9:F9

B10: =B8–B9, copy to C10:F10 B11: =SUM($B9:B9), copy to C11:F11

(Continued)

352 ❧ ® Corporate Financial Analysis with Microsoft Excel

Figure 11-4 shows an adjusted DDB solution. The correction is made by using the straight-line method to calculate depreciation for the last two years. Because the total depreciation during the last two years is $6200 (calculated as the difference between the book value at the beginning of the fourth year and the salvage value), the SLN method during years four and five is $3100, or one-half the total.

The SYD method can be used instead of the SLN method for the last two years. In that case, the depreciation for the fourth year would have been $4133 (i.e., 2/3 of $6200), and for the fifth year it would have been $2067 (1/3 of $6200).

Figure฀11-4

Double-Declining Balance Depreciation with Adjustment

1 Example 11-4: DOUBLE-DECLINING BALANCE DEPRECIATION, ADJUSTED

2 Asset cost

3 Salvage value

4 Life, years

5 Depreciation Schedule

Year

7 1 2 3 4 5 8 Book value, beginning of year

16,200 $ 13,100 9 Annual depreciation

3,100 $ 3,100 10 Book value, end of year

13,100 $ 10,000 11 Accumulated depreciation

14 ASSET COST = $75,000

15 $80,000 16 BOOK VALUE, BEGINNING OF YEAR

26 VALUE YEAR-END BOOK VALUE

33 ANNUAL DEPRECIATION ANNUAL DEPRECIATION

37 YEAR NUMBER

4 SALVAGE VALUE 38

Key Cell Entries

B8: =B2 C8: =B10, copy to D8:F8 B9: =DDB($B2,$B3,$B4,B7,2), copy to C9:D9 E9: =($E8–$B3)/($F7–$D7) or SLN($E8,$B3,2), copy to F9

B10: =B8–B9, copy to C10:F10 B11: =SUM($B9:B9), copy to C11:F11

Depreciation and Taxes ❧ 353

DDB(cost, salvage, life, period, factor)