PER UNIT COST ALLOCATION OF INVESTED CAPITAL WITH ANTICIPATED NON-LEVEL PRODUCTION: THE CASE OF EXTRACTIVE INDUSTRIES

The concept of equivalent annual annuity (EAA) has long been used as a method of costing recovery of invested capital and the required return on invested capital over the productive life of a capital project. Academic texts almost universally use EAA methodology with level payment streams (annuities) to allocate capital costs. We develop a methodology for allocating capital costs evenly over each unit of production for projects with anticipated non-level production. This methodology uses a modified EAA approach that allows non-level annuity payment streams. Capital cost allocation is an important component in computing the value of extracted minerals for severance tax purposes; however, many firms and state and federal agencies use ad hocdepreciation schedules to allocate these costs. Ad hocdepreciation methods such as modified accelerated cost recovery system (MACRS) may be appropriate for income tax purposes but are inconsistent with commonly found requirements that severance taxes “shall be assessed on the wellhead or mine mouth fair market value.” The modified EAA approach provides a straightforward alternative that is based on sound financial methodology.     

The Impact of Retirement on Household Leisure Expenditures

Household leisure expenditures for retired and near‐retired households were examined in order to better understand the dynamics associated with the move to retirement status. Data from the 1995 Consumer Expenditure Survey indicated that retirement, total expenditures, and education had positive impacts on leisure expenditures. For retired households, greater total expenditures and education increased expenditures, while age and the presence of earned income decreased expenditures. For near‐retired households, greater total expenditures, education, and the presence of asset income significantly increased leisure expenditures.