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In this course, author Curt Frye shows how to perform a wide range of financial calculations quickly and easily using the many financial functions found in Excel 2010. The course details dozens of functions for evaluating cash flows; calculating depreciation; determining rates of return, bond coupon dates, and security durations; and more.
The declining balance and adouble declining balance methods let you capture most of an asset's depreciation early in its economic life. For a building, which has the useful life of 30 years, these aggressive depreciation schedules generate huge tax offsets in the first few years. The downside of this type of schedule is that you get to offset almost no depreciation toward the end of the asset's economic life. If you use a variable declining balance approach, you can mix declining balance and straight-line strategies to capture more of the benefits toward the end of the asset's life.
In Excel you use the VDB function to calculate variable declining balance depreciation. I've set up this worksheet so that I have all of the data that I need, so I have the initial cost of the asset. In this case that's $50,000. Then the salvage value which is the amount for which we can sell this item for scrap. Then the item's economic life, which is expressed in years, in this case 10. And then you need to tell Excel the start period and the end period for which you want to calculate the balance.
So in this case the start period will be your number eight and the end period will be your number nine. And then the final two arguments are optional. The first is a factor and the factor is the same as in the double declining balance function, which is DDB. If you want to use double declining balance you set the factor to 2, or leave it blank because 2 is the default value. If you want to use triple-declining balance then you can set the factor to 3, and so on. The final argument is called switch or switch method.
The idea behind the variable declining balance method is that you take the double-declining or triple-declining balance depreciation until that value is less than what the straight- line depreciation would be. When the double declining balance method depreciation would be less than the straight-line depreciation setting the argument to true causes Excel to stay with double-declining balance instead of switching, while setting the argument to false would cause it to switch to the straight-line method. So with those arguments in place we can create the VDB function, so I'll type equal And then vdb, again for variable declining balance, then type a left parentheses and we can start filling in the cells that contain the arguments.
So our vost is in cell C3 ,then a comma, salvage value C4, the economic life which is the total number of years is in C5, the start period for which we're calculating is in cell C6, the end period is in C7, and then the factor is in cell C8, and we do have it set to 2 for double declining balance, and then we have these method, whether we're going to switch method or not. And in this case we will, so it set to true and that's in cell C9. Then we type right parentheses to close out the functions arguments, make sure everything looks good, and I will press Tab.
So I don't scroll down on the worksheet. And when I press Tab, Excel completes the formula and we receive that depreciation for the years 8 and 9 it will be $1677.72. If we were to change the start period to 1 and the end period to 2 then we would see that we have substantially more depreciation. Again, we use the double declining balance method at first and then when the DDB calculation would generate less depreciation than straight-line we switch to straight-line.
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