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148 Section 13: Investment Analysis
File name: hp 12c_user's guide_English_HDPMBF12E44 Page: 148 of 209
Printered Date: 2005/7/29 Dimension: 14.8 cm x 21 cm
Excess Depreciation
When accelerated depreciation is used, the difference between total depreciation
charged over a given period of time and the total amount that would have been
charged under straight-line depreciation is called excess depreciation. To obtain
excess depreciation:
1. Calculate the total depreciation then press \.
2. Key in the depreciable amount (cost less salvage) then press \. Key in the
useful life of the asset in years then press z. Key in the number of years in
the income projection period then press § to get the total straight-line
depreciation charge.
3. Press - to get the excess depreciation.
Example:
What is the excess depreciation in the previous example over 7
calendar years
?
(Because of the partial first year, there are 6
1
/
2
years
depreciation in the first 7 calendar years.)
Keystrokes Display
9429.56\
9,429.56
Total depreciation through seventh
year.
10500\
10,500.00
Depreciable amount.
8z
1,312.50
Yearly straight-line depreciation.
6.5§
8,531.25
Total straight-line depreciation.
-
898.31
Excess depreciation
Modified Internal Rate of Return
The traditional Internal Rate of Return (IRR) technique has several drawbacks which
hamper its usefulness in some investment applications. The technique implicitly
assumes that all cash flows are either reinvested or discounted at the computed
yield rate. This assumption is financially reasonable as long as the rate is within a
realistic borrowing and lending range (for example, 10% to 20%). When the IRR
becomes significantly greater or smaller, the assumption becomes less valid and
the resulting value less sound as an investment measure.
IRR also is limited by the number of times the sign of the cash flow changes
(positive to negative or vice versa). For every change of sign, the IRR solution has
the potential for an additional answer. The cash flow sequence in the example that
follows has three sign changes and hence up to three potential internal rates of
return. This particular example has three positive real answers: 1.86, 14.35, and
29. Although mathematically sound, multiple answers probably are meaningless
as an investment measure.