WACC and Depreciation Methods

Group 1
WACC and Depreciation

Methods
Calculating and Financial Modeling
FINANCIAL MODELING - FINALS

Learning Objectives:
To define what is WACC and how to

compute it
To define what is Depreciation Method
To identify the various method under

Depreciation Method and how to
compute them
What is WACC?
WACC stands for Weighted Average Cost of
Capital
It represents a firm's average cost of capital from all
sources, including common stock, preferred stock,
bonds, and other forms of debt.
WACC is important because it becomes a baseline to
determine suitable investments for the business's
success.
To calculate the WACC we need:
• Debt - total capital raised from the debts
• Equity - total capital raised from equity
• Cost of Debt - cost pf raising debt
• Cost of Equity - return that the shareholders or
indevstors from their holding in the company
• Tax rate - prevailing corporate tax rate
WACC formula:
Example:
The Business Model
Mario Corporation has the following capital structure:
• It has a debt of P6,023,000 with 8.5% interest
• It has a equity of P4,421,00 for which the company expects a return of 15%
Competitive
• It is subject to the 25% corporate income tax Advantage
Computation:
9%
Industry
Excel formula:
D2
D6
=D2/D6
Depreciation Methods
-it is the charge calculated to write of the fixed asset pver theur
expected useful lives.
A. Straightline Method(SLN Function)

Simplest and most used technique that calculated depreciation that calculate
depreciation at a fixed rate over the expected useful life of an asset.
Formula:
Excel formula:
B5
B6
B
7
=SLN($B$5,$B$6,$B$7)
2022 2023 2024 2025 2026 2027 2028 2029 2030
2 3 4 5 6 7 8 9 10
₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱5,700,000
Accumulated Depreciation=P5,700,000
B. Declining Balance Method
These methods are also called the reducing balance,
diminishing value, or accelerated methods. Assets are
more useful when they are new and therefore depreciate
more quickly in the first few years of acquisition.
Some of the various declining methods

• Fixed Declining Method
• Double Declining Balance Method
• Fixed Declining Balance Method
It calculates depreciation at a fixed rate.

. This rate is calculated by the formula:
1 − ((𝑆𝑎𝑙𝑣𝑎𝑔𝑒/𝐶𝑜𝑠𝑡)ˆ(1/𝐿𝑖𝑓𝑒)).
The most challenging part of the fixed declining method is to figure out
the correct percentage to use for each year, but it will become a lot easier
using the DB function in MS Excel.
Excel formula:
B5
B6
B
7
=DB($B$5,$B$6,$B$7,B10)
2022 2023 2024 2025 2026 2027 2028 2029 2030
2 3 4 5 6 7 8 9 10
₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱570,000 ₱5,700,000
₱1,151,514 ₱853,272 ₱632,274 ₱468,515 ₱347,170 ₱257,253 ₱190,624 ₱141,253 ₱104,668 ₱5,700,544
Accumulated Depreciation=5,700,544
• Double Declining Balance Method
It also calculates depreciation at a fixed rate.

The rate per annum is calculated as :
(2 × (100/Expected useful life))%.
This method is quite similar to the fixed declining method, except

that the first year’s depreciation uses double the percentage of the
straight-line method.
Excel formula:
B5
B6
B
7
=DDB($B$5,$B$6,$B$7,B10)
Sum-of-the-Years Digits Method
Unlike the previous three (3) methods of calculating depreciation, the SYD
method calculates depreciation at varying rates for each period.
However, as with the straight-line method, the sum-of-the-years digits method

uses a constant depreciable base (cost less𝑛(𝑛+1) salvage value).
The sum of the years’digits is calculated as n(n+1)/2 where 𝑛 is equal to the
useful life in years.
Depreciation for each period is then calculated as:

The Business Model
Computation: Competitive
Advantage
(𝐶𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒)(𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 − 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑒𝑟𝑖𝑜𝑑𝑠)

𝑆𝑌𝐷 =
𝑛(𝑛 + 1)
2
(6,000,000 − 300,000)(10 − 0)
𝑆𝑌𝐷 =
10(10 + 1)
2
(5,700,000)(10)
=
10(11)
2
57,000,000
=
55 Industry
Excel formula:
B5
B6
B
7
=SYD($B$5,$B$6,$B$7,B10)
Thank You!
Presented by: Group 1
Cabico, Rovelyn
Collado, Roselle
Salting, Jhonallyn
Samonte, Arianne
Pangan, Carl Justine
Victoria, Jessa

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Group 1

WACC and Depreciation

FINANCIAL MODELING - FINALS

To define what is WACC and how to

To define what is Depreciation Method

To identify the various method under

A. Straightline Method(SLN Function)

Some of the various declining methods

It calculates depreciation at a fixed rate.

It also calculates depreciation at a fixed rate.

This method is quite similar to the fixed declining method, except

However, as with the straight-line method, the sum-of-the-years digits method

Depreciation for each period is then calculated as:

(𝐶𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒)(𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 − 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑒𝑟𝑖𝑜𝑑𝑠)

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