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DECISION THEORY. With reference to engineering economy, it is a branch of economic analysis devoted to the study of decision processes involving multiple possible outcomes, defined either discretely or on a continuum, and deriving from the theory of games and economic behavior and probabilistic modeling.
DECISION TREE. In decision analysis, a graphical representation of the anatomy of decisions showing the interplay between a present decision, probability of chance events, possible outcomes and future decisions, and their results or payoffs.
DECISIONS UNDER CERTAINTY. From the literature of decision theory, that class of problems wherein single estimates with respect to cash flows and economic life (complete information) are used in arriving at a decision among alternatives.
DECISIONS UNDER RISK. From the literature of decision theory, that class of problems in which multiple outcomes are considered explicitly for each alternative and the probabilities of the outcomes are assumed to be known.
DECISIONS UNDER UNCERTAINTY. From the literature of decision theory, that class of problems in which multiple outcomes are considered explicitly for each alternative but the probabilities of the outcomes are assumed to be unknown.
DEFENDER. In replacement analysis, the presently owned property or equipment being considered for replacement by the most economical challenger. In the analysis of multiple alternatives, the previously judged acceptable alternative against which the next alternative to be evaluated (the challenger) is to be compared.
DEFLATING (BY A PRICE INDEX). Adjusting some nominal magnitude, e.g., an actual dollar estimate, by a price index. It may be required in order to express that magnitude in units of constant purchasing power. (See ACTUAL DOLLARS, INFLATING, CONSTANT DOLLARS.) (CURRENT DOLLARS.)
DEFLATION. A decrease in the relative price level of a factor of production, an output, or the general price level of all goods and services. A deflationary period is one in which there is (or is expected to be) a sustained decrease in price levels.
DEMAND FACTOR. (1) The ratio of the current production rate of the system divided by the maximum instantaneous production rate. (2) The ratio of the average production rate, as determined over a specified period of time, divided by the maximum production rate. (3) In electric utility operations, it is the ratio of the maximum kilowatt load demanded during a given period divided by the connected load. (See CAPACITY FACTOR, LOAD FACTOR.)
DEPLETION. (1) An estimate of the lessening of the value of an asset due to a decrease in the quantity available for exploitation. It is similar to depreciation except that it refers to such natural resources such as coal, oil, and timber. (2) A form of capital recovery applicable to properties such as listed above. Its determination for income tax purposes may be on a unit of production basis, related to original cost or appraised value of the resource (known as cost depletion), or based on a percentage of the income received from extracting or harvesting (known as percentage depletion).
DEPLETION ALLOWANCE. An annual tax deduction based upon resource extraction. (See DEPLETION.)
DEPRECIATION. (1) a) Decline in value of a capitalized asset; b) A form of capital recovery, usually without interest, applicable to property with two or more years’ life span in which an appropriate portion of the asset’s value periodically is charged to current operations. (2) A loss of value due to physical or economic reasons. (3) In accounting, depreciation is the allocation of the book value of this loss to current operations according to some systematic plan. Depending on then existing income tax laws, the amount and timing of the charge to current operations for tax purposes may differ from that used to report annual profit and loss.
DEPRECIATION, ACCELERATED. Depreciation methods accepted by the taxing authority which write off the value (cost) of an asset usually over a shorter period of time (i.e., at a faster rate) than the expected economic life of the asset. For example, the Accelerated Cost Recovery System (ACRS) introduced in the U.S. in 1981 and modified in later years.
DEPRECIATION ALLOWANCE. An annual income tax deduction, and/or charge to current operations, of the original cost of a fixed asset. The income tax deduction may not equal the charge to current operations. (See DEPRECIATION.)
DEPRECIATION BASIS. In tax accounting, the cost or otherwise determined value of a group of fixed assets, including installation costs and certain other expenditures, and excluding certain allowances. The depreciation basis is the amount which by law, and/or acceptance by the taxing authority, may be written off for tax purposes over a period of years.
DEPRECIATION, DECLINING BALANCE. A method of computing depreciation in which the annual charge is a fixed percentage of the depreciated book value at the beginning of the year to which the depreciation charge applies.
DEPRECIATION, MULTIPLE STRAIGHT-LINE. A method of depreciation accounting in which two or more straight-line rates are used. This method permits a predetermined portion of the asset to be written off in a fixed number of years. One common practice is to employ a straight-line rate which will write off 3/4 of the cost in the first half of the anticipated service life with a second straight-line rate used to write off the remaining 1/4 in the remaining half life. (See DEPRECIATION, STRAIGHT LINE.)
DEPRECIATION, SINKING FUND. (1) A method of computing depreciation in which the periodic charge is assumed to be deposited in a sinking fund that earns interest at a specified rate. The sinking fund may be real but usually is hypothetical. (2) A method of depreciation where a fixed sum of money regularly is deposited at compound interest in a real or hypothetical fund in order to accumulate an amount equal to the total depreciation of an asset at the end of the asset’s estimated life. The depreciation charge to operations for each period equals the sinking fund deposit amount plus interest on the beginning of period sinking fund balance.
DEPRECIATION, STRAIGHT-LINE. A method of computing depreciation wherein the amount charged to current operations is spread uniformly over the estimated life of an asset. The allocation may be performed on a unit of time basis or a unit of production basis or some combination of the two.
DEPRECIATION, SUM-OF-YEARS-DIGITS. A method of computing depreciation wherein the amount charged to current operations for any year is based on the ratio: (years of remaining life)/(1 + 2 + 3 + ... + n), n being the estimated life.
DETERIORATION. A reduction in value of a fixed asset due to wear and tear and action of the elements. It is a term used frequently in replacement analysis.
DEVELOPMENT COST. (1) The sum of all the costs incurred by an inventor or sponsor of a project up to the time that the project is accepted by those who will promote it. (2) In international literature, activities in developing nations intended to improve their infrastructure.
DIRECT COST. A traceable cost that can be segregated and charged against specific products, operations, or services.
DISCOUNTED CASH FLOW. (1) Any method of handling cash flows over time, either receipts or disbursements, in which compound interest and compound interest formulae are employed in their analytical treatment. (2) An investment analysis which compares the present worth of projected receipts and disbursements occurring at designated times in order to estimate the rate of return from the investment or project. (See RATE OF RETURN, PROFITABILITY INDEX.)
DISCOUNT RATE. (See INTEREST RATE, DISCOUNTED CASH FLOW.)
DOLLARS, CONSTANT (REAL DOLLARS). Dollars (or some other monetary unit) of constant purchasing power independent of the passage of time. In situations where inflationary or deflationary effects have been assumed when cash flows were estimated, those estimates are converted to constant dollars (base year dollars) by adjustment by some readily accepted general inflation/deflation index. Sometimes termed actual dollars, although this term also is used to describe current dollar values. (See ACTUAL DOLLARS, INFLATING, DEFLATING.) (CURRENT DOLLARS.)
DOLLARS, CURRENT (THEN CURRENT DOLLARS). Estimates of future cash flows which include any anticipated changes in amount due to inflationary or deflationary effects. Usually these amounts are determined by applying an index to base year dollar (or other monetary unit) estimates. Sometimes termed actual dollars, although this term also is used to describe constant dollar values. (See CONSTANT DOLLARS, INFLATING, DEFLATING.)
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