Leveraged Buyouts: A Practical Guide to Investment Banking and Private Equity, + Website

CHAPTER 14

Accelerated Depreciation

As mentioned in Chapter 9, the U.S. tax method for depreciating assets is the Modified Accelerated Cost Recovery System (MACRS). This is an accelerated method of depreciation. Because the straight-line method is more universal and better demonstrates the core uses of depreciating assets, we had originally built the Heinz model using the straight-line method. However, in such a buyout scenario as the one we are studying, where the company will be private, it will most likely no longer be required to produce generally accepted accounting principles (GAAP) financials. If a private Heinz only reports tax statements, then it may depreciate assets using the MACRS schedule. In such landmark deals, however, rules constantly change. So, as there is a bit of uncertainty, we will build both and incorporate a switch to toggle between the two possible methods. Once we know more detail about the transaction, we can toggle the switch accordingly. This will help us determine if the difference even makes a significant enough impact to the overall returns. If it does not, then we know this is not one of the primary assumptions that we need to focus on.

MACRS

The MACRS system is the current tax depreciation method in the United States.

Most business and investment property placed in service after 1986 is depreciated using MACRS.

(www.irs.gov)

This may be a good time to review Chapter 9, which gives a conceptual overview of the MACRS method. In this advanced section ...