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The value at the end of the useful life is called residual value or salvage value The straight-line method allocates the decline from cost to the salvage value over the expected life Fractional periods are allocated in an intuitive manner For example, if an asset is acquired halfway through the year, a fractional portion of a full year s expense is included in both the rst and last years of the expected life If an asset is still productive after the passage of the original expected useful life, no additional expense is included for the bonus years The value of the asset remains on the books, but the ACCUMULATED DEPRECIATION reduces the value to the assumed salvage value A second method that has historically been used by accountants is called the double-declining-balance method The accountant again estimates the expected life of the asset.

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1 Needs analysis A The goal is to establish a saving schedule for the client, which requires the following: (1) The age of the child (2) The age at which the child will attend college (3) The after-tax earnings rate of the parents (4) The in ation-adjusted interest rate (5) The current cost of tuition and the rate of increase the rate of increase is generally the rate of in ation but can differ B Example: John Harris wants to plan for his son s education His son was born today and will attend a private university for four years beginning at age 18 Tuition is currently $20,000 a year and increases annually at 7 percent, whereas in ation increases only at 3 percent per year John expects to earn an after-tax return of 10 percent from investments How much must John save at the end of each year if he would like to make his last payment at the beginning of his son s rst year of college C Solution: Requires three steps: (1) In ate the current cost of tuition by the tuition in ation rate for the number of years until the child begins college Calculator 20,000 [PV]; 18 [N]; 7 [I]; 0 [PMT] = 67,598 [FV] (2) Calculate the present value of an annuity due for the number of years the child will attend college Use the in ation-adjusted discount rate for this step Calculator begin mode; 67,598 [PMT]; 0 [FV]; 4 [N]; 110 [ENTER] 107 [ ] 1 [ ] 100 [ ][I] = 259,530 [PV] (3) Determine the periodic payment that must be made to reach the account balance in step 2 Calculator end mode; 259,530 [FV]; 18 [N]; 10 [I]; 0 [PV] = 5,691 [PMT] 2 Tax credits and deductions A Hope Credit (1) Available only for rst two years of undergraduate work (2) Quali ed expenses include tuition (books and supplies are included as quali ed tuition only if the fees must be paid to the institution as a condition of enrollment) (3) Expenses that do not qualify include room and board and, generally, books and supplies (4) The amount of credit is 100 percent of the rst $1,000 of quali ed tuition you paid for each eligible student and 50 percent of the next $1,000 (5) The maximum amount is $1,500 times the number of eligible students B Lifetime Learning Credit (1) Available for all years of undergraduate and graduate work (2) Quali ed expenses include tuition (books and supplies are included as quali ed tuition only if the fees must be paid to the institution as a condition of enrollment) (3) Expenses that do not qualify include room and board and, generally, books and supplies.

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Then, a percentage decline is calculated solely from the expected life For example, if the asset is expected to last 10 years, one tenth or 10 percent is the assumed decline in value in each year For double-declining-balance, however, twice this amount is used So,.

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