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DDB: Calculating depreciation using the double-declining balance method

From: Excel 2010: Financial Functions in Depth

Video: DDB: Calculating depreciation using the double-declining balance method

The declining balance method of calculating depreciation enables companies to accelerate the rate at which they claim the tax benefits inherent in asset depreciation. As the name implies, the double declining balance depreciation method doubles the rate at which the declining balance method calculates an asset's depreciation. To calculate depreciation using the double declining balance method, you use the DDB function and the DDB function has five arguments. The first is the Initial Cost of the asset, in this case 34 million.

DDB: Calculating depreciation using the double-declining balance method

The declining balance method of calculating depreciation enables companies to accelerate the rate at which they claim the tax benefits inherent in asset depreciation. As the name implies, the double declining balance depreciation method doubles the rate at which the declining balance method calculates an asset's depreciation. To calculate depreciation using the double declining balance method, you use the DDB function and the DDB function has five arguments. The first is the Initial Cost of the asset, in this case 34 million.

Then the Salvage Value and that is the value for which you can sell the asset as scrap at the end of its economic life. That's $1 million. Then we have the Economic Life and for a building that's assumed to be 30 years. And then the fourth argument is the Period and in this case it is years. So I have a series of years in cells d6 through d15, for years 1 through 10 of this 30-year economic life. And then finally we have cells to calculate the depreciation using the DDB function.

Now the fifth argument we're not going to use and that is called a factor. The factor allows you to identify how quickly you want the declining balance method to work. So for example, the double declining balance method has a factor of two and that's assumed it's the default value; however if you want to use triple declining balance method then you could make the factor 3. But in this case, we'll stay with the basic double declining balance method, so in cell E6 I'll press of the equals key and then type ddb and then a left parenthesis and now I can start adding my arguments.

So the cost is in cell b7, type a comma. Salvage value is B9, then a comma. Then the life is in cell b11. That's the economic life, the number of years the asset has economic value. And then finally the period and that is in cell d6. Now before I type a right parenthesis and press Enter, I need to make a couple of changes to my references. When I complete this formula and press Enter, Excel will copy it down to the remaining rows in this column of the table. When it does that, the references for B7, B9, and B11 will change because I currently have them listed as relative references.

To make them absolute references I need to do a little something with them. So to change B7 from a relative reference to an absolute reference, I click in the reference itself and then press F4 and the dollar signs indicate that it's now an absolute reference. I'll do the same for B9. Click inside the reference and pressing F4 and the same for B11 because I don't want those references to change. Now d6 I can leave as-is and the reason is that as the cell formula gets copied down, I want the reference to change from d6 to d7 so it uses 2, d8, so it uses 3, and so on.

So with that formula in place, I can type a right parenthesis, verify one more time that everything looks good, and press Enter. And when I do, Excel calculates the double declining balance depreciation for each of the first 10 years. The double declining balance method assigns a high percentage of an asset's depreciation to the first part of its economic life. As with the declining balance method, companies can use their depreciation and related tax savings to invest in other areas.

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Excel 2010: Financial Functions in Depth

52 video lessons · 13967 viewers

Curt Frye
Author

 
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  1. 2m 11s
    1. Welcome
      1m 6s
    2. Using the exercise files
      36s
    3. Disclaimer
      29s
  2. 28m 32s
    1. PMT: Calculating a loan payment
      3m 31s
    2. PPMT and IPMT: Calculating principal and interest per loan payment
      4m 18s
    3. CUMPRINC and CUMIPMT: Calculating cumulative principal and interest paid between periods
      4m 30s
    4. ISPMT: Calculating interest paid during a specific period
      2m 13s
    5. EFFECT and NOMINAL: Finding nominal and effective interest rates
      3m 31s
    6. ACCRINT and ACCRINTM: Calculating accrued interest for investments
      4m 15s
    7. RATE: Discovering the interest rate of an annuity
      2m 41s
    8. NPER: Calculating the number of periods in an investment
      3m 33s
  3. 19m 5s
    1. SLN: Calculating depreciation using the straight-line method
      1m 48s
    2. DB: Calculating depreciation using the declining balance method
      3m 10s
    3. DDB: Calculating depreciation using the double-declining balance method
      3m 20s
    4. SYD: Calculating depreciation for a specified period
      2m 13s
    5. VDB: Calculating declining balance depreciation for a partial period
      3m 24s
    6. AMORDEGRC: Calculating depreciation using a depreciation coefficient
      2m 27s
    7. AMORLINC: Calculating depreciation for each accounting period
      2m 43s
  4. 22m 33s
    1. FV: Calculating the future value of an investment
      2m 48s
    2. FVSCHEDULE: Calculating the future value of an investment with variable returns
      2m 21s
    3. PV: Calculating the present value of an investment
      2m 6s
    4. NPV: Calculating the net present value of an investment
      3m 17s
    5. IRR: Calculating internal rate of return
      2m 33s
    6. XNPV: Calculating net present value given irregular inputs
      2m 32s
    7. XIRR: Calculating internal rate of return for irregular cash flows
      1m 48s
    8. MIRR: Calculating internal rate of return for mixed cash flows
      2m 2s
    9. DISC: Calculating the discount rate of a security
      3m 6s
  5. 24m 12s
    1. COUPDAYBS: Calculating total days between coupon beginning and settlement
      3m 2s
    2. COUPDAYS: Calculating days in the settlement date's coupon period
      2m 48s
    3. COUPDAYSNC: Calculating days from the settlement date to the next coupon date
      3m 1s
    4. COUPNCD: Calculating the next coupon date after the settlement date
      2m 43s
    5. COUPNUM: Calculating the number of coupons between settlement and maturity
      2m 55s
    6. COUPPCD: Calculating the date of a coupon due immediately before settlement
      3m 4s
    7. DURATION: Calculating the annual duration of a security
      3m 20s
    8. MDURATION: Calculating the duration of a security using the modified Macauley method
      3m 19s
  6. 28m 43s
    1. DOLLARDE and DOLLARFR: Converting between fractional prices and decimal prices
      2m 36s
    2. INTRATE: Calculating the interest rate of a fully invested security
      2m 50s
    3. RECEIVED: Calculating the value at maturity of a fully invested security
      2m 46s
    4. PRICE: Calculating the price of a security that pays periodic interest
      3m 19s
    5. PRICEDISC: Calculating the price of a discounted security
      2m 48s
    6. PRICEMAT: Calculating the price of a security that pays interest at maturity
      1m 57s
    7. TBILLEQ: Calculating the bond-equivalent yield for a Treasury bill
      1m 50s
    8. TBILLPRICE: Calculating the price for a Treasury bill
      1m 31s
    9. TBILLYIELD: Calculating the yield of a Treasury bill
      1m 41s
    10. YIELD: Calculating the yield of a security that pays periodic interest
      2m 59s
    11. YIELDDISC: Calculating the annual yield for a discounted security
      2m 9s
    12. YIELDMAT: Calculating the annual yield of a security that pays interest at maturity
      2m 17s
  7. 12m 1s
    1. ODDFPRICE: Calculating the price of a security with an odd first period
      3m 17s
    2. ODDFYIELD: Calculating the yield of a security with an odd first period
      3m 3s
    3. ODDLPRICE: Calculating the price of a security with an odd last period
      2m 44s
    4. ODDLYIELD: Calculating the yield of a security with an odd last period
      2m 57s
  8. 1m 5s
    1. Additional resources
      1m 5s

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