Straight Line Depreciation
Verink has developed a generalized equation that is particularly adapted to corrosion engineering problems. This equation takes into account the influence of taxes, straight-line depreciation, operating expenses, and salvage value in the calculation of present worth and annual cost. Using this equation, a problem can be solved merely by entering data into the equation with the assistance of compound interest data: (reference)
- where:
- A represents the annual end-of-period cash flow
- F represents a future sum of money
- i% represents the interest rate expressed as a decimal
- n is the number of years
- PW is the present worth referred also as Net Present Value (NPV)
- P is the cost of the system at time 0
- S represents salvage value
- t is the tax rate expressed as a decimal
- X represents the operating expenses
- First Term [-P]: This term represents the initial project expense, at time zero. As an expense, it is assigned a negative value. There is no need to translate this value to a future value in time, as the PW approach discounts all money values to the present (time zero).
- Second Term [{t(P-S)/n}(P/A, i%, n)]: the second term in this equation describes the depreciation of a system. The portion enclosed in braces expresses the annual amount of tax credit permitted by this method of straight-line depreciation. The portion in parentheses translates these as equal amounts back to time zero by converting them to present worth.
- Third Term [-(1-t)(X)(P/A, i%, n)]: the third term in the generalized equation consists of two terms. One is (X)(P/A, i%, n) that represents the cost of items properly chargeable as expenses, such as the cost of maintenance, insurance, and the cost of inhibitors. Because this term involves expenditure of money, it also comes with a negative sign. The second part, t(X)(P/A, i%, n), accounts for the tax credit associated with this business expense and because it represents a saving it is associated with a positive sign.
- Fourth Term [S(P/F, i%, n)]: the fourth term translates the future value of salvage to present value. This is a one time event rather than a uniform series and therefore it involves the single payment present worth factors. Many corrosion measures, such as coatings and other repetitive maintenance measures, have no salvage value, in which cases this term is zero.
Present Worth (PW) can be converted to equivalent annual cost (A) by using the following formula:
