Modeling Depreciation

[hedgefund06]

Here is a question for all of you other analysts out there. I am trying to forecast depreciation of a restaurant company. The formula I am using is estimated operating weeks * depreciation per week. My problem is that this assumes that the value of building a restaurant remains the same over time which we know is not true. If you assume that the company is growing units at a pretty healthy clip say 10-15% the new stores should have the affect of raising this average depreciation per week. Can anyone think of a better way to model this? Thank you in advance.

 

[abacus]

While I think of a way to model this, I am curious to know why you are including the operating weeks in your model. From the day property is bought to the day it is sold, should it not depreciate, regardless of holidays or when the place is open etc?

 

[Dermot81]

Take existing PP&E, estimate its useful life (look for information in the 10k), salvage value, then depreciate it using DDB or SYD.

Next you will need to estimate capex. You can either break it out into maintenance capex and growth capex, or just peg it to sales and assume the company's expenditures move in step with sales.

Now you need to depreciate the capex. If you are modelling depreciation out over a period of years, you will need to keep factoring in that year's new capex in your total capex depreciation calculation.

Now add exisiting depreciation with capex depreciation to get total depreciation payment for that year.

 

[Super I]

abacus -

I'm assuming that he means counting operating weeks based on day it opens until the end of the year, without holiday, etc adjustments.

hedgefund -

Why don't you simplify it to a half year convention - assume that irrrespective of when it opens you take a half year dep[reciation in the year it opens. It also works out to be the same if you assume that restaurants are opened evenly throughout the year.

As far as the cost of openign a restaurant, does it really change that much within a given year so that you need to worry anout it? You also have geographic cost assumptions that you must be making some concessions on in your model.

 

[hedgefund06]

Basically what I am doing is for example... If the average restaurant costs $1,500,000 to build and it will be depreciated over 30 years with a salvage value of $100,000. I am taking (1,500,000-100,000) / (30*52). Which gives you a weekly depreciation of $897 then I am multiply that buy the total operating weeks menaing if a company has 100 restaurants open for all 13 weeks in a quarter they will have 100*13 or 1300 operating weeks. So the deprecation in this example would be 1300*897 or $1,166,100. Thanks for all the input.

 

[Super I]

hedgefund -

A couple of final points.

Your method only makes sense if you know from their footnotes that they use straight line depreciation over 30 years (I'm assuming you're looking at book not tax financial statements).

Unless you're prepping something less than annual financial statements (quarterly, semi-annual) you can use the shortcut I mentioned and more or less get the same result

If you are also prepping a balance sheet and cash flow statement you need to figure out iof they have a different tax method of depreciation to get a deferred tax liability figure.