The life cycle depreciation (LCD) model

Abstract

<p>The introduction of the life cycle life estimation concept was brought about by the need to improve the accuracy of life forecasts for certain types of telecommunication property. The main characteristic of these properties is that they are subject to rapid and cyclical technological change. In conjunction with the life cycle life estimation concept it has been necessary to reconsider the related capital recovery procedures. This study examines in detail a life cycle depreciation (LCD) model;Four steps are required for the model: Data analysis, life cycle forecasts, life estimation, and depreciation calculation. Among the four steps, the forecasts of the life cycles are the key to the accuracy of capital recovery. The depreciation rates are computed by the Investment Recovery Life (IRL) and the Remaining Investment Recovery Life (RmIRL) from the life estimation of a life cycle. The characteristics of the life cycle depreciation are also presented;The LCD model is compared with the conventional depreciation models, and is tested and validated using known property life cycles based on property experience simulated with Iowa type curves. The IRL is shown to be able to represent the overall life characteristics of the life cycle and to produce capital recovery results duplicating the broad group depreciation method. The results of the capital recovery studies on the simulated data also indicated that the LCD depreciation model is equivalent to the traditional vintage group depreciation if both have the same forecasting capabilities;Finally, the effects of life estimation on reserve requirements were examined by applying the life cycle depreciation model to the actual property data. The data were from crossbar, analog-ESS, and digital-ESS switching equipment accounts of several telecommunications companies. These analyses indicated that the actual prescribed depreciation rates have been too low to adequately recover the investment over the property's expected life. Tests were made to determine the sensitivity of the reserve level to errors in life cycle forecasting. All the companies experienced reserve deficiencies for their actually reported reserve levels even when excessively long life cycles were applied to the model;The life cycle depreciation model presented in this study has shown to be not only correct but also readily applicable.</p>