W14_UDS_Fuel Tank Truck Feasibility Study Part 2: Best Depreciation Method

  1. Problem Evaluation

Continue tank truck operation evaluation in blog posting W13, this time author want to research what the best depreciation is. The best mean give more benefit of Author Company such as minimize income tax and also give financial projection of tank truck operational cash flow.

  1. Development of feasible alternatives

There are four depreciation models that will compare to get best method:

  1. Straight Line Method
  2. Declining Balance Method
  3. Declining with switchover to Straight Line Method
  4. MACRS Method

 

  1. Development the outcome for each alternative

Those four method depreciation are choose to compare two group method, commonly use method such as  Straight Line Method and Declining Balance Method, and not commonly use such as Declining with switchover to Straight Line Method and MACRS Method. All method will be compare by depreciation value; bigger depreciation value will get lower income tax.

  1. Selection of criteria

The best method is the method that has the biggest depreciation value. Depreciation value is get from sum present worth of all year depreciation result of each method. 

  1. Analysis and comparison of the alternative

To simulate this depreciation comparison author will use 24 KL aluminum fuel tank truck data. Those data is in table below.

Table 1. Fuel Tank Truck Data

Next step is data calculating of each depreciation method, according to straight line method:

dk = (B – SVN) / N

dk* = k. dk for 1 ≤ k ≤ N

BVk = B – dk*

According to Declining Balance method:

d1 = B(R)

dk = B (1 – R)k-1 (R)

dk* = B (1 – (1 – R)k)

BVk = B (1-R)k

Where:

N               = depreciable life of the asset in years

B                = cost basis, including allowable adjustments

Dk             = annual depreciation deduction in year k (1 ≤ k ≤ N)

BVk           = book value at end of year k

SVN          = estimated salvage value at end of year N

dk*             = cumulative depreciation through year k

The calculation results of four depreciation methods are in table below:

Table 2. Straight Line Method

To demonstrate Declining Balance method, the author use 300% DB equations and result of calculation based on above equation is

Table 3. 300% Declining Balance Method

Method of Declining Balance Method Switchover to Straight Line Depreciation, in this method the first step is the asset would be depreciated by the 300% DB Method (R =3/N). Because the DB method never reach a zero BV, suppose that author further specify that at switchover to SL depreciation to will be made to ensure a BV of zero (determined salvage value).

Table 4. DB Method Switchover to SL Method

To determine the MACRS (GDS) with half year convention assumption and period of analysis in 6 years based on GDS property class.

Table 5. MACRS (GDS) Method, Using Half year convention

Table 6. PW(12) Comparison

Figure 1. PW(12) of each method

  1. Alternative selection

As can be seen above MACRS method have the largest PW(12) than other. We can conclude MACRS method is the best alternative that more attractive to profitable companies.

  1. Performance monitoring & Post Evaluation Result

To get the best result of method we have to find most appropriate model of depreciation. We should calculate PW of depreciation value of each method, because bigger PW of depreciation value will get lower income tax and more profit of our company.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2014). Engineering economy 16th Edition. Chapter 7 – Depreciation and income tax., pp.332-391. Prentice Hall.
  2. Planning Planet. (2017). Acquiring Equipment For The Project. Retrieved from http://www.planningplanet.com/guild/gpccar/acquiring-equipment-for-the-project
  3. Accounting-Simplified.com (2017). Depreciation Methods. Retrieved from http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html
 

W13_UDS_Fuel Tank Truck Feasibility Study Part 1: Replacement Analysis

  1. Problem Evaluation

Enhancing of My W10 blog posting about car replacement analysis, this time I will evaluate about fuel tank truck replacement analysis. Based on the author company SOP life time 24 KL aluminum tank truck is 15 years, but in years 11th the head truck must be replace with the new one combine with old trailer tank. In this unique situation trigger me to deep dive what the best alternative of fuel tank truck replacement: do nothing (follow SOP), change new all, or leasing?

  1. Development of feasible alternatives

In this evaluation there are three feasible options:

  1. Follow SOP Policy (only change the head truck at year 11th)
  2. Change all with the new
  3. Leasing

Author will analysis these three options which most efficient and also determine when Economic life of fuel tank truck.

  1. Development the outcome for each alternative

Two common methods in replacement analysis are present worth approach and Equivalent Uniform Annual Cost (EUAC). The reason why I chose those two methods because present worth method can calculate in present time how much the cost of two alternatives during economic life and from EUAC method I can get annual cost of each alternative with equivalent uniform / condition. Comparing the value of present worth and EUAC are the good way to know which the best alternative is.

  1. Selection of criteria

The Rule of thumb in present worth method; choose the Alternative with the highest value. The opposite of present worth method, in EUAC method we choose alternative with smallest value. The highest value of present worth method and smallest value of EUAC indicate the best alternative from economic perspective. And for the economic life is minimum total year by year marginal cost (minimum EUAC) in all period.

  1. Analysis and comparison of the alternative

Defender and challenger data that will be used in PW and EUAC calculation are in the table below:

Table 1. Alternatives data

After that is calculate data using PW and EUAC method. The Calculation result of PW and EUAC method are in table below:

Table 2. PW calculation result

Table 3. EUAC calculation result

Table 4. Economic Life of Alternative

  1. Alternative selection

Based on PW and EUAC calculation result Change All Alternative dominating over other alternative in both PW and EUAC Method. The PW of Change All is greater than PW of SOP Policy and Leasing (IDR -1,687,647,340 > IDR -1,705,410,492 > IDR -2,055,370,427). And Change All has the smallest EUAC (IDR 468,169,796 < IDR 473,097,468 < IDR 570,179,759). Thus, the old Fuel Tank Truck should be replaced immediately with all new product (Head Truck and Tank Trailer). This evaluation result also align my question before about why change head truck only.

From the economic life evaluation we also get the optimum years of the tank truck should be used. SOP Policy Alternative wills optimum in 5 years use and for change all will optimum in 2 years use. Based on PW, EUAC and economic life evaluation we get big picture of alternative sequence there is follow SOP Policy until 10 years then change the tank truck and trailer with the new one for 2 years using only.

  1. Performance monitoring & Post Evaluation Result

Combination PW, EUAC and economic life evaluation will give you complete picture of alternative selection such as best alternative, sequence, and duration. It will help us to prepare all what it need, especially in alternative changing.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P.(2014). Engineering economy 16th Edition. Chapter 9 – Replacement Analysis., pp.427-466. Prentice Hall.
  1. The University of Tuledo (2017). Replacement Analysis. Retrieved from http://www.eng.utoledo.edu/~nkissoff/lessons/Lesson14.html
  2. Kullabs.com (2017). Note on Replacement Analysis and Economic Service Life. Retrieved from https://www.kullabs.com/classes/subjects/units/lessons/notes/note-detail/6002