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1. What are the three distinct definitions of depreciation?
They are: decline in market value of an asset; decline in value of an asset to its owner; systematic allocation of the cost of an asset over its depreciable life. (p. 333)
2. Explain briefly why depreciation is a non-cash expense.
It is mainly because the firm has already paid for the asset up front, and depreciation is simply a way to claim the wearing out of the asset over time. (p. 334)
3. Explain briefly why depreciation should be considered in after-tax economic analysis.
It is mainly because depreciation deductions reduce the taxable income of a business, which reduces the amount of tax paid, and taxes are cash flows. (p. 334)
4. What are the four general depreciation methods?
They are: straight-line depreciation, sum-of-year’s digit’s depreciation, declining-balance depreciation, and unit-of-production depreciation. (pp. 337-342)
5. Define depletion and list the two methods of depletion.
Depletion refers to the consumption of exhaustible natural resources owing to their removal. The two methods are percentage depletion and cost depletion. (p. 353)