In MACRS, what is the treatment of residual value when calculating depreciation?

In the Modified Accelerated Cost Recovery System (MACRS), residual value is considered irrelevant in the calculation of depreciation. This method allows for a more accelerated depreciation approach, typically resulting in a larger depreciation expense in the earlier years of an asset's life.

One of the key features of MACRS is that it does not require the estimation of a project's residual value at the time of calculating depreciation. Instead, depreciation is calculated solely based on the asset's acquisition cost over a predetermined recovery period. This simplification streamlines the process for businesses, as they do not need to factor in the potential value of the asset at the end of its useful life, thereby focusing strictly on the cost recovery of the asset.

This approach contrasts with other methods of depreciation, such as straight-line depreciation, where residual value can play a significant role in determining annual expenses.