15/07/2020

CE40-2: ENGINEERING ECONOMICS

CHAGAYATIN

LEARNING OUTCOME

CE40-2: Use depreciation or depletion methods to reduce the book value of a

capital investment in an asset and natural resource.

ENGINEERING
ECONOMICS
COURSE OUTCOME 3
Deal with risk and uncertainty in
project outcomes by applying
economic decision making
concepts CO3-DEPRECIATION
Engr. Charity Hope Gayatin

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CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS
CHAGAYATIN CHAGAYATIN

PURPOSES OF DEPRECIATION DEPRECIATION TERMINOLOGIES

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1. To provide for the recovery of capital which has been invested in DEPRECIATION
physical property. ur
2. To enable the cost o f depreciation to be charged to the cost
is a book method to represent the reduction in value of a tangible
asset. (Amortization used to reflect the decreasing value of
intangible assets)
producing products or services that results from the use of the
so
property.
FIRST COST, P OR UNADJUSTED BASIS, B
is the delivered and installed cost of the asset including purchase
3. Depreciation is a tax-allowed deduction included in tax price, delivery and installation fees, and other depreciable direct
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calculations. costs incurred to prepare the asset for use. The term unadjusted
basis , or simply basis , is used when the asset is new, with the term
Taxes = (income – deductions)(tax rate) adjusted basis used after some depreciation has been charged.
m
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DEPRECIATION TERMINOLOGIES DEPRECIATION TERMINOLOGIES

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BOOK VALUE, BV MARKET VALUE, MV

represents the remaining, undepreciated capital investment on the a term also used in replacement analysis, is the estimated amount
books after the total amount of depreciation charges to date has realizable if the asset were sold on the open market.
been subtracted from the basis.
a

SALVAGE VALUE, SV
sh

RECOVERY PERIOD, n is the estimated trade-in or market value at the end of the asset’s
is the depreciable life of the asset in years. Often there are different useful life.
n values for book and tax depreciation. Both of these values may
be different from the asset’s estimated productive life.
DEPRECIATION RATE OR RECOVERY RATE, d
is the fraction of the first cost removed by depreciation each year.
This rate may be the same or different each year.

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 15/07/2020

CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS

CHAGAYATIN CHAGAYATIN

DEPRECIATION TERMINOLOGIES DEPRECIATION TERMINOLOGIES

PERSONAL PROPERTY PHYSICAL LIFE

one of the two types of property for which depreciation is allowed length of time during which the property is capable of performing
is the income-producing, tangible possessions of a corporation the function for which it was designed and manufactured.
used to conduct business.

ECONOMIC LIFE
REAL PROPERTY length of time during which the property may be operated at a
includes real estate and all improvements—office buildings, profit.
manufacturing structures, test facilities, warehouses, apartments,
and other structures. Land itself is considered real property, but it is
not depreciable.

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CHAGAYATIN CHAGAYATIN

TYPES OF DEPRECIATION TYPES OF DEPRECIATION

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1. NORMAL DEPRECIATION 2. Depreciation due to changes in price levels

ability of a property to produce results

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a. PHYSICAL DEPRECIATION- is due to the lessening of the physical 3. DEPLETION- this refers to the decrease in the value of a property
due to the gradual extraction of its contents.
so
b. FUNCTIONAL DEPRECIATION- is due to the lessening in the
demand for the function which the property was designed to
render.
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DEPRECIATION METHODS DEPRECIATION METHODS

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1. STRAIGHT LINE METHOD STRAIGHT LINE METHOD PROBLEM

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assumes that the loss in value is directly proportional to the age of An electronic balance costs P90,000 and has an estimated salvage
the property d = ( CO – CL ) / L value of P8000 at the end of its 10years lifetime. What would be the
book value after 3years using the straight line method in solving for
Dn = n (CO – CL ) / L the depreciation?
a

Cn = CO – Dn
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d - annual cost of depreciation

L - useful life of the property in years
CO - original cost
CL - value at the end of life, scrap value
Cn - book value at the end of n years
Dn - depreciation up to age n years

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CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS

CHAGAYATIN CHAGAYATIN

DEPRECIATION METHODS DEPRECIATION METHODS

STRAIGHT LINE METHOD PROBLEM 2. SINKING FUND METHOD
An electronic balance costs P90,000 and has an estimated salvage assumes that the funds will accumulate for replacement
value of P8000 at the end of its 10years lifetime. What would be the
book value after 3years using the straight line method in solving for d = ( CO – CL ) / ( F/A, i%, L )
the depreciation? Dn = d ( F/A, i%, n )
d = ( C O – CL ) / L Cn = CO – Dn
Dn = n ( CO – CL ) / L = n d d - annual cost of depreciation
Cn = CO – Dn
L - useful life of the property in years
d = ( 90,000 – 8,000 ) / 10 = P8,200 CO - original cost
D3 = 3 (8,200) = P24,600 CL - value at the end of life, scrap value
C3 = 90,000 – 24,600 = P65,400
Cn - book value at the end of n years
Dn - depreciation up to age n years

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CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS
CHAGAYATIN CHAGAYATIN

DEPRECIATION METHODS DEPRECIATION METHODS

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SINKING FUND METHOD PROBLEM SINKING FUND METHOD PROBLEM
A firm bought equipment for P560,000. Other expenses including A firm bought equipment for P560,000. Other expenses including
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installation amounted to P4000. The equipment is expected to
have a life of 16years with a salvage value of 10% of the original
cost of the equipment. Determine the book value at the end of
12years by sinking fund method at 12% interest.
installation amounted to P4000. The equipment is expected to
have a life of 16years with a salvage value of 10% of the original
cost of the equipment. Determine the book value at the end of
12years by sinking fund method at 12% interest.
so
d = ( CO – CL ) / (F/A, i%, L) (564,000 − 56,000)
d=
Dn = d ( F/A, i%, n) (1.12)16 −1
Cn = CO – Dn 0.12
CO- unadjusted basis (564,000 − 56,000) (1.12)12 −1
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= 560,000+4000 D12 =
(1.12)16 −1 0.12
=P564,000 0.12
C =10%Co Equipment = P286,753.01
L
= 0.10(560,000) C12 = 564,000-286,753.01
=P56,000
m =P277,246.99
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COURSE OUTCOME 3

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