Midterm Lesson Notes SV = ₱50,000

Capitalized Cost i = 5% cpd annually

It is the sum of first cost and the present worth CC = FC + RC
of all replacement cost, operating cost and ₱300,000−₱50,000
manufacturing cost. RC = (1+.05)20 −1

Case I: No replacement cost, only maintenance cost RC = ₱ 151,212.91

and operation cost every period.
CC = ₱ 300,000 + ₱ 151,212.91
SP1. Determine the capitalized cost of a laboratory
facility that requires an investment of ₱3,500,000 with CC = ₱ 451,212.91
an annual maintenance cost of ₱300,000 if the money
is worth 8% annually.
CASE 3: With replacement cost, maintenance cost and
repair cost every period
Solution:
SP4
Capitalized Cost = 1st cost + Maintenance Cost
A concrete bridge is worth ₱4,500,000 and to
₱300,000
Cap. Cost=₱3,500,000 + Perpetuity be replaced at the end of its useful life of 25 years. The
.08
Cap. Cost = ₱3,500,000 + ₱3,750,000 annual maintenance cost is ₱30,000 while repair cost
every 5 years interval is ₱200,000. If worth of money
CC = ₱ 7,250,000 is 10% cpd annually, determine the capitalized cost.
CC = FC + Replacement Cost + Maintenance cost +
SP2: ME Brd. Exam Oct. 2009 Repair Cost

An equipment was purchased ₱1,200,000 FC = ₱4,500,000

annual operating and maintenance cost is ₱150,000. FC−SV
Replacement Cost = (1+𝑖)𝑘 −1
If worth of money is 8% cpd. annually, determine the
capitalized cost. 4,500,000−0
Replacement Cost = (1+0.10)25 −1
Solution:
Replacement Cost = ₱457,563.52
CC = 1st cost + Annual operating & maintenance
cost

CC = ₱1,200,000 +
₱150,000
Perpetuity Maintenance Cost = Perpetuity
.08
₱30,000
CC = ₱3,075,000 Maintenance Cost = .10
= ₱300,000

CASE 2: With replacement Repair Cost:

𝑨
Formula: RC = (𝟏+𝒊)𝒌 −𝟏 A = ₱200,000

A = amount needed to replace a property every “k”

period
A = (FC-SV); FC = first period, SV = Salvage Value
i = interest rate or worth of mone
k = periods
₱200,000 ₱200,000
SP3 Repair Cost = (1+0.10)5 −1 - (1+0.10)25−1

An equipment is worth ₱300,000 and must be replaced Repair Cost = ₱327,600.33 - ₱20,336.16
at the end of its economic life of 20 years. If the salvage
value of the equipment is ₱50,000, and worth of Repair Cost = ₱307,264.17
money is 5% cpd annually, determine the capitalized
cost.
CC = ₱4,500,000 + ₱457,563.52 + ₱300,000 +
Solution:
₱307,264.17
Given: 1st cost = ₱300,000
CC = ₱ 5,564,827.69
k=20 years
 Depreciation, Depletion and Inflation SP2
Depreciation – the decrease in value of property such ME Md. April 2002
as machine, equipment, building or structure due to
The first cost of machine is ₱90,000 with
passage of time (Excluding antiques, paintings, coins,
economic life of 8 years. If the book value at the end
and land).
of 3 years is ₱63,000, calculate the salvage value by
Methods used in solving depreciation: straight line method.
1. Straight Line Method Given: FC = ₱90,000
2. Sinking Fund Method
3. Sum of Years Digit (SYD) method n = 8 years
4. Declining Balance method or Matheson’s BV = ₱63,000
Formula or Constant Percentage of
Declining Value SV = (?)
5. Double Declining Balance Method BV3 = FC – D3
₱63,000 = ₱90,000 - D3
STRAIGHT LINE METHOD D3 = ₱27,000
𝑭𝑪−𝑺𝑽
• Annual Depreciation, d = 𝒏
• Total Depreciation at the end of “x” years, 𝐹𝐶−𝑆𝑉
(𝑭𝑪−𝑺𝑽) D3 =( )(3 years)
𝑛
Dx = (x years)
𝒏
₱90,000−𝑆𝑉
• Book Value at the end of “x” years BVx, ₱27,000=( )(3 years)
8 𝑦𝑒𝑎𝑟𝑠
BVx = FC - Dx
Where: FC = First Cost SV = ₱18,000
SV = Salvage Cost
n = periods (economic life)
SP3
SP1 ECE Bd. Nov 2009
CE Bd. Nov 2007 The first cost of equipment if ₱530,000 with
an estimated salvage value if 10% of the first cost. If
The Cost of equipment is ₱ 500,000 with
the book value at the end of 5 years is ₱291,500,
useful life of 5 years. The cost of installation is
₱30,000. If the salvage value is 10% of the equipment determine the useful life equipment by straight line
method.
cost, determine the book value at the end of 4th year by
straight line method. Given: FC = ₱530,000
FC = Equipment Cost + Installation Cost SV = (.10)( ₱530,000) = ₱53,000
FC = ₱ 500,000 + ₱30,000 BV = ₱291,500
FC= ₱530,000 n = (?)
SV = (.10) ₱ 500,000 = ₱ 50,000 BV5 = FC – D5
n = 5 years ₱291,500 = ₱530,000 – D5
BV4 = (?) D5 = ₱238,500
BV4 = FC – D4
𝐹𝐶−𝑆𝑉
D4 =( 𝑛
)(x years) D5 =(
𝐹𝐶−𝑆𝑉
)(5 years)
𝑛
530,000−50,000
D4 =( )(4 years) ₱238,500=(
₱530,000−₱53,000
)(5 years)
5 𝑛

D4 = ₱384,000 n = 10 years
BV4 = ₱530,000 – ₱384,000
BV4 = ₱ 146,000
 SINKING FUND METHOD SP2

Annual Depreciation, A machine was purchased for ₱180,000 with

salvage value of ₱15,000 at the end of its useful life. If
(𝑭𝑪−𝑺𝑽)𝒊
d =(𝟏+𝒊)𝒏 −𝟏 the depreciation cost on the 1st year is ₱9,780.71 and
worth of money is 6% annually. Determine the useful
Total Depreciation at the end of “x” years Dx life by sinking fund method.
𝒅[(𝟏+𝒊)𝒙 −𝟏]
Dx = Given: FC = ₱180,000 i = 6%
𝒊
SV = ₱15,000 n = (?)
Book Value at the end of “x” years BVx
d1 = ₱9,780.71
BVx = FC - Dx
(𝐹𝐶−𝑆𝑉)−1
d=
(1+𝑖)𝑛−1

SP1 (₱180,000−₱15,000)(0.06)
₱9,780.71 =
(1.06)𝑛−1
ME Bd. Oct 2011
(₱180,000−₱15,000)(0.06)
(1.06)n – 1 =
An equipment was purchased for ₱30,000, 6 ₱9,780.71
years ago. Salvage value is ₱8000, four (4) years from
(1.06)n = 1.10122 + 1
now. If the owner wished to sell the equipment now and
worth of money is 6% annually, calculate the selling n ln(1.06) = ln(2.10122)
price by sinking found method.
n = 12.74 years
Given: FC = ₱30,000
SP3
n = 10 years; x = 6 years
The machine is worth ₱80,000 with an
SV = ₱8000 estimated salvage value “x” at the end of 20 years. If
the book value at the end of 2 years is ₱77,272.85
i = 6%
and worth of money is 8% annually, calculate the
BV6 = (?) salvage value by sinking fund method.

BV6 = FC – D6 EQ. 1 Given: FC = ₱80,000

D6 = Total depreciation at the end of 6 years SV = x

𝒅[(𝟏+𝒊)𝒙 −𝟏] n = 20 yeas
D6 = 𝒊
BV2 = ₱77,272.85
𝒅[(𝟏+𝟎.𝟎𝟔)𝟔−𝟏]
D6 = EQ. 2
𝟎.𝟎𝟔 i = 8% annually
BV2 = FC – D2
(𝐹𝐶−𝑆𝑉)𝑖
d =(1+𝑖)𝑛−1 ₱77,272.85 = ₱80,000 - D2

(₱30,000−₱8000)(0.06) D2 = ₱2727.15
d= (1+0.06)10 −1

d = ₱2,048.43
𝑑[(1+𝑖)𝑥−1]
D2 = 𝑖

𝑑[(1.08)2 −1]
₱2,048.43[(𝟏.𝟎𝟔)𝟔−𝟏] ₱2727.15=
D6 = 0.08
𝟎.𝟎𝟔
₱2727.15(0.08)
D6 = ₱14,288 d= (1.08)2 −1

d = ₱1311.13
FINALLY!
BV6 = ₱30,000 – ₱14,288 (𝐹𝐶−𝑆𝑉)𝑖
d=
(1+𝑖)𝑛−1
BV6 = ₱15,712.00
(₱80,000−𝑆𝑉)(.08)
₱1311.13 = (1.08)20−1

SV = ₱20,000.12
 SUM OF YEARS DIGIT (SYD) METHOD SP2
Annual Depreciation An equipment was purchased for ₱9,000
𝒏−(𝒎−𝟏)
with a salvage value of ₱1,000 at the end of 10 years.
d = (FC – SV) [ ∑𝒏
]
Calculate:
Total Depreciation at the end of “m” years Dm
a.) Depreciation cost on the 2nd and 3rd year
∑𝒎 b.) Book value at the end of 5 years
Dm = (FC – SV) [ ∑ ]
𝒏
Given: FC = ₱9,000 d2 = ? BV5 = ?
Book Value at the end of “m” years BVm
SV = ₱1,000 d3 = ?
BVm = FC - Dm
Solving for d2 = ?; m = 2
Where:
𝑛−(𝑚−1)
d2= (FC – SV) [ ]
∑ 𝑛 = sum of years ∑𝑛

𝑛 10−(2−1)
∑ 𝑛 = (n+1); n = useful life/economic life d2= (₱9,000– ₱1,000) [ ∑𝑛
]
2
𝑛
∑ 𝑚 = sum of reversed digits ∑ 𝑛 = (n+1)
2
𝑚
∑ 𝑚 = (a1 + am) 10
2 ∑𝑛 = (10+1) = 55
2
a1 = 1st reversed digit 10−(2−1)
d2 = (₱9,000– ₱1,000) [ 55
]
am = last revered digit
d2 = ₱1,309.10
SP1
An equipment has a first cost of ₱20,000
and a salvage value of ₱1,000 at the end of 10 years. d3= (FC – SV) [
𝑛−(𝑚−1)
]
∑𝑛
Determine the book value at the end of 6 years by
SYD method. d3 = (₱9,000– ₱1,000) [
10−(3−1)
]
55
Given: FC = ₱20,000 D6 = ?
d2 = ₱1163.63
SV = ₱1,000 where: m = 6years
n =10 years
BV5 = ₱9,000 – D5
Solution: ∑𝑚
D5 = (FC – SV) [ ∑ ]
𝑛
BV6 = FC – D6
∑𝑚
BV6 = ₱20,000 – D6 D5 = (₱9,000 – ₱1,000) [ 55 ]
∑𝑚 𝑚
D6 = (FC – SV) [ ∑ 𝑛 ] ∑ 𝑚 = (a1 + am)
2

𝑛 5
∑ 𝑛 = (n+1) ∑ 𝑚 = (10 + 6) = 40
2 2

10 40
∑𝑛 = (10+1) = 55 D5 = (₱9,000 – ₱1,000) [ ]
2 55

D5 = ₱5818.18
𝑚
∑ 𝑚 = (a1 + am) BV5 = ₱9,000 – ₱5818.18
2

6 BV5 = ₱3181.82
∑ 𝑚 = (10 + 5) = 45
2
45
D6 = (₱20,000 – ₱1,000) (55)

D6 = ₱15,545.00
FINALLY!
BV6 = FC – D6
BV6 = ₱20,000 – ₱15,545.00
BV6 = ₱4455.00
SP3 SP1
A machine has a first cost of ₱120,000 with A machine worth ₱720,000 is estimated to
an estimated useful life of 10 years. If the book value have a book value of ₱40,545.73 at the end of 10
at the end of 2 years is ₱82,690.91, determine the years. Calculate the annual rate of depreciation by
salvage value by SYD method. Matheson’s formula.
Given: FC = ₱120,000 Given: FC = ₱720,000
n = 10 years BV10 = ₱40,545.73
BV2 = ₱82,690.91; m = 2 years k = ? (annual rate of depreciation)
SV= ? n = 10 years; x = 10 years
Solution: BV10 = FC(1-k)x
BV2 = FC – D2 ₱40,545.73 = ₱720,000(1-k)10
₱82,690.91 = ₱120,000 – D2 ₱40,545.73
(1-k)10 = ₱720,000
D2 = ₱37,309.00
(1-k)10 = 0.0563135
10
1- √0.0563135 = k
∑𝑚
D2 = (FC – SV) [ ∑ ]
𝑛 k = 0.25 or 25
∑𝑚
₱37,309.00 = (₱120,000 – SV) [ ∑ 𝑛 ]
𝑛 SP2
∑ 𝑛 = (n+1)
2
A machine has a first cost of ₱150,000 with a
10
∑𝑛 = (10+1) = 55 useful life of 8 years and with a salvage value of
2
₱9000. Calculate the depreciation cost on the 5th year
𝑚
∑ 𝑚 = (a1 + am) by declining balance method.
2
2 Given: FC = ₱150,000
∑ 𝑚 = (10 + 9) = 19
2
n = 8 years; x = 5 years
19
₱37,309.00 = (₱120,000 – SV) [55]
SV = ₱9000
SV = ₱12,000.00
d5 = ?
Solution:
MATHESON’S FORMULA, OR d5 = FC(1-k)x-1.k
DECLINING BALANCEMETHOD, OR
𝑛 𝑆𝑉
k=1- √
CONSTANT PERCENTAGE OF DECLINING VALUE 𝐹𝐶

Annual Rate of depreciation, K 8 ₱9000

k = 1 - √₱150,000
𝒏 𝑺𝑽
k = 1 - √𝑭𝑪 k = 0.2965 or 29.65%

Depreciation cost on the “x” year, dx d5 = ₱150,000 (1 - 0.2965)4(0.2965)

dx = FC(1-k)x-1.k d5 = ₱10,893.62

Book value at the end of “x” years, BVx

BVx = FC(1-k)x
Total depreciation at the end of “x” years, Dx
Dx = FC - BVx
SP3 SP2
An equipment has a first cost of ₱20,000 and The cost of machine is ₱1,400,000 with
a salvage value of ₱1000 at the end of the useful like useful life of 8 years and a salvage value of ₱10,000.
of 10 years. Calculate the book value at the end of 6 Determine the depreciation cost on the 4th year by
years by constant percentage of declining value. double declining balance method.
Given: FC = ₱20,000 Given: FC = ₱1,400,000
SV = ₱1000 SV = ₱10,000
n = 10 years; x = 6 years n = 8 years; x = 4th year
BV6 = ? d4 = FC(1-k)x-1.k
BVx = FC(1-k)x k=
2
𝑛
BV6 = (₱20,000)(1-k)6 2
k = 4 = 0.25
𝑛 𝑆𝑉
k = 1 - √𝐹𝐶 d4 = (₱1,400,000)(1-0.25)3( 0.25)

10 ₱1000 d4 = ₱147,656
k = 1 - √₱20,000
ADDITIONAL
k = 0.2589 or 25.9% Calculate the depreciation cost on the 3rd
BV6 = (₱20,000)(1-0.259)6 year and 5th year.

BV6 = ₱3310.85 d3 = FC(1-k)3-1.k

d3 = (₱1,400,000)(1-0.25)2( 0.25)

DOUBKE DECLINING BALANCE d3 = ₱196,875

Annual Rate of Depreciation, k

𝟐 d5 = FC(1-k)5-1.k
k=
𝒏
d5 = (₱1,400,000)(1-0.25)4( 0.25)
Depreciation cost on “x” years, dx
d5 = ₱110,742.19
dx = FC(1-k)x-1.k
Book Value at the end of “x” year, BVx
DEPLETION
BVx = FC(1-k)x
The decrease in value of the property due to
Total depreciation at the end of “x” years, Dx gradual extraction of its contents. (ex. Mines, oil and
Dx = FC - BVx gas wells, timber lands and quarries)

SP1 𝑨
C= 𝒊
𝒓+(𝟏+𝒊)𝒏−𝟏
An equipment is worth ₱500,000 with a salvage value
of ₱25,000 at the end of useful like of 25 years.
Calculate the book value at the end of 8 years by A = Annual income or dividend
double declining balance method. i = worth of money or interest rate
Given: FC = ₱500,000 r = rate of return on investment or yield
SV = ₱25,000 n = periods
n = 25 years ; x = 8 years C = present worth of property
BV8 = ?
BV8 = FC(1-k)x
2
k=𝑛
2
k = 25 = 0.08

BV8 = (₱500,000)(1-0.08)8
BV8 = ₱256,699.44
SP1
An oil wells is estimated to generate an
annual income of ₱15,000,000 that will last for 25
years then it will become useless. The group of
businessmen is interested to purchase the oil wells.
The estimated return on oil is 20%. If worth of money
is 18%, calculate how much the businessman must pay
for the oil wells.
Given: A = ₱15,000,000/ year
SP3
The investor purchased the mine for
₱1,160,416.65 that will last for 8 years. It is estimated
that the yield is 15% annually. If worth of money is
4%, calculate the annual income that will be
generated from his investment
Given: C = ₱1,160,416.65
n = 8 years

n= 25 years r = .15

r = .20 i = .04

i = .18 A=?
𝑨
C = ? Present worth of the oil well C= 𝒊
𝒓+
(𝟏+𝒊)𝒏 −𝟏
₱15,000,000
C= .18 ₱1,160,416.65 =
𝑨
.20+ .𝟏𝟓 +
.𝟎𝟒
(1+.18)25 −1 (𝟏+.𝟎𝟒)𝟖 −𝟏

C = ₱73,921,184.58 A = ₱300,000
₱300,000
Total income = (8 years)
𝑦𝑒𝑎𝑟
SP2
= ₱ 2,400,000
An investor purchased the mine worth
₱1,100,000 that estimated to generate an income
₱200,000/ year for 10 years then it will become
useless. If worth of money is 4.5% annually, calculate
the rate of return on his investment.
Given: C = ₱1,100,000
A = ₱200,000/ year
n = 10 years
i = .045
r=?
𝑨
C= 𝒊
𝒓+
(𝟏+𝒊)𝒏 −𝟏

₱200,000
₱1,100,000 = .𝟎𝟒𝟓
𝒓+
(𝟏+.𝟎𝟒𝟓)𝟏𝟎 −𝟏

r = 10.04%