Technical Question: Depreciation/Half-Year Convention
Going over some of the WSO PE prep material, and one of the prompts says a project will take 2 years to complete. Approximately 75% of the project is being complete in year 1, and the remaining 25% will be completed in year 2. Useful life of the project is 10 years.
The CapEx for the project in year 1 is $75, while CapEx in year 2 is $25.
The Depreciation for the CapEx spent in year 1 is calculated as follows:
Year 1 Capex / 2 / Useful Life
or
$75/2/10
Why do they divide the initial capex by 2? Is it because of the Half-Year Convention?
The remaining depreciation is simply Capex/Useful life:
Example:
Depreciation of CapEx from year 1 = $75/10 years
Many thanks!
Yes because it's the first year of capex so you assume, on average, it was spent during the middle of the year. The same concept applies when you add capex to your tax pools.
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