Section 13: Investment Analysis 145
Excess Depreciation
When accelerated depreciation is used, the difference between total depreciation
charged over a given period of time and the total amount that would have been
charged under straight-line depreciation is called excess depreciation. To obtain
excess depreciation:
1. Calculate the total depreciation then press \.
2. Key in the depreciable amount (cost less salvage) then press \. Key in
the useful life of the asset in years then press z. Key in the number of
years in the income projection period then press § to get the total
straight-line depreciation charge.
3. Press - to get the excess depreciation.
Example: What is the excess depreciation in the previous example over 7
calendar years? (Because of the partial first year, there are 6½ years depreciation
in the first 7 calendar years.)
Modified Internal Rate of Return
The traditional Internal Rate of Return (IRR) technique has several drawbacks
which hamper its usefulness in some investment applications. The technique
implicitly assumes that all cash flows are either reinvested or discounted at the
computed yield rate. This assumption is financially reasonable as long as the rate
is within a realistic borrowing and lending range (for example, 10% to 20%).
When the IRR becomes significantly greater or smaller, the assumption becomes
less valid and the resulting value less sound as an investment measure.
IRR also is limited by the number of times the sign of the cash flow changes
(positive to negative or vice versa). For every change of sign, the IRR solution
has the potential for an additional answer. The cash flow sequence in the
example that follows has three sign changes and hence up to three potential
internal rates of return. This particular example has three positive real answers:
1.86, 14.35, and 29. Although mathematically sound, multiple answers probably
are meaningless as an investment measure.
Keystrokes (RPN mode) Display
9429.56\
9429.56
Total depreciation through seventh
year.
10500\
10,500.00
Depreciable amount.
8z
1,312.50
Yearly straight-line depreciation.
6.5§
8,531.25
Total straight-line depreciation.
-
898.31
Excess depreciation
