BANSILAL RAMNATH AGARWAL CHARITABLE

TRUST’S VISHWAKARMA INSTITUTE OF TECHNOLOGY

PUNE-411037

Plant Engineering and Process Economics

Home Assignment Report
On

“Estimation of Depreciation”

Under The Guidance of Prof. Yashashree Pankar

Prajwal Ghadge Roll No 25 Gr. No. 12010609

Jeetsing Girase Roll No 26 Gr. No. 12010428
Vedant Kale Roll No 33 Gr. No. 12010608
Parikshit Sonar Roll No 65 Gr. No. 12010797
 Bansilal Ramnath Agarwal Charitable Trust’s
VISHWAKARMA INSTITUTE OF
TECHNOLOGY
(An Autonomous Institute Affiliated to the Savitribai Phule Pune University)
666, Upper Indiranagar, Bibwewadi, Pune – 411 037

May 2024

CERTIFICATE
It is certified that the project
work entitled

“Design: Estimation of Depreciation”

Submitted by

Prajwal Ghadge Roll No 25 Gr. No. 12010609

Jeetsing Girase Roll No 26 Gr. No. 12010428
Vedant Kale Roll No 33 Gr. No. 12010608
Parikshit Sonar Roll No 65 Gr. No. 12010797

Is the original work carried out by them under the supervision of Prof. Yashashree Pankar
and is approved for the partial fulfilment of the requirement of the Savitribai Phule Pune
University, for the award of the Degree of Bachelor of Technology (Chemical)

Prof. Yashashree Pankar Prof. Dr. Manik Deosarkar

Internal Guide, Head,
Department of Chemical Department of Chemical
Engineering VIT, Pune Engineering VIT, Pune
This Project Work has not been submitted earlier to any other Institute or University for the
award of any degree or diploma.
 Acknowledgements

This assignment is prepared by the inspiration received from our guide, Prof.
Yashashree Pankar, and Head of Department of Chemical Engineering, Prof. (Dr.)
Manik Pundlikrao Deosarkar, BRACT’s Vishwakarma Institute of Technology, Pune.
Many colleagues and faculty members at the Chemical Engineering Department have
carefully read and approved the document; their contributions are gratefully
acknowledged
 Table of content

Introduction
Mathematical Methods for Depreciation

Problem statement 1
Problem statement 2
Conclusion
Reference
 INTRODUCTION

What Is Depreciation?
The term depreciation refers to an accounting method used to allocate the cost of a tangible or
physical asset over its useful life. Depreciation represents how much of an asset's value has
been used. It allows companies to earn revenue from the assets they own by paying for them
over a certain period of time.
Because companies don't have to account for them entirely in the year the assets are
purchased, the immediate cost of ownership is significantly reduced. Not accounting for
depreciation can greatly affect a company's profits. Companies can also depreciate long-term
assets for both tax and
Types of Depreciation
There are several methods that accountants commonly use to depreciate capital assets and
other revenue-generating assets. These are straight-line, declining balance, double-declining
balance, sum-of-the-years' digits, and unit of production. We've highlighted some of the basic
principles of each below.
Straight-Line
Using the straight-line method is the most basic way to record depreciation. It reports an
equal depreciation expense each year throughout the entire useful life of the asset until the
entire asset is depreciated to its salvage value.
Declining Balance
The declining balance method is an accelerated depreciation method. This method
depreciates the machine at its straight-line depreciation percentage times its remaining
depreciable amount each year. Because an asset's carrying value is higher in earlier years, the
same percentage causes a larger depreciation expense amount in earlier years, declining each
year.

Example of Depreciation
Here's a hypothetical example to show how depreciation works. Keep in mind, though, that
certain types of accounting allow for different means of depreciation. Let's assume that if a
company buys a piece of equipment for $50,000, it may expense its entire cost in year one or
write the asset's value off over the course of its 10-year useful life. This is why business
owners like depreciation. Most business owners prefer to expense only a portion of the cost,
which can boost net income.
The company can also scrap the equipment for $10,000 at the end of its useful life, which
means it has a salvage value of $10,000. Using these variables, the account calculates
depreciation expense as the difference between the asset's cost and its salvage value, divided
by its useful life. The calculation in this example is ($50,000 - $10,000) / 10. This results in a
total of $4,000 of depreciation expenses per year.

As such, the company's accountant does not have to expense the entire $50,000 in year one,
even though the company paid out that amount in cash. Instead, the company only has to
expense $4,000 against net income. The company expenses another $4,000 next year and
another $4,000 the year after that, and so on until the asset reaches its $10,000 salvage value
in 10 years.

The double-declining balance (DDB) method is another accelerated depreciation method.

After taking the reciprocal of the useful life of the asset and doubling it, this rate is applied to
the depreciable base—its book value—for the remainder of the asset’s expected life. Thus, it
is essentially twice as fast as the declining balance method.

Depreciation methods to consider

Here are four common methods used to calculate annual depreciation expense depending on
the asset:
1. Straight-line depreciation

The straight-line method calculates an average decline in value over a period. This is the most
common method and the simplest way to calculate depreciation. In straight-line depreciation,
the expense amount is the same every year over the useful life of the asset. You can use the
straight-line method on assets such as vehicles, office furniture, equipment, and buildings.
A variation of the straight-line calculation is the fractional period depreciation. Assets
acquired in the middle of the year use the fractional period depreciation application. In this
case, the partial period calculation uses a fraction of the straight-line method to value the
asset.

Straight-line depreciation formula

The straight-line method provides the same deduction amount every year until the asset
reaches the salvage value or full depreciation. Here's the formula for straight-line
depreciation:

Straight-line depreciation = (Cost − Salvage value of the asset) / Useful life

Where:

● Cost is the purchase or acquisition price of the asset

● Salvage value is the value of the asset remaining after its useful life

● Useful life of the asset is the number of years an asset is expected to be used

2. Double-declining balance depreciation

The declining balance method assumes an asset is valuable in its earlier years and loses value
in the coming years. It declines over time until it reaches its salvage value or full
depreciation. New companies or those expecting less revenue in their first years may choose
this method to lower tax bills by claiming larger depreciation expenses. This method is also
known as the diminishing balance method, reducing balance method or written down value
method.

Some companies may use the double-declining balance method, which applies a more
accelerated depreciation. The declining balance method is often used to determine
depreciation for computers, mobile phones and other technology products that quickly
become obsolete.

Here's the formula for double-declining balance depreciation:

Double-declining balance depreciation = 2 x Beginning book value x Rate of

depreciation
Where:

● Beginning book value is the asset’s value at the start of the year. This figure changes
every year.

● Rate of depreciation = (100% / Useful life of asset). This figure stays the same.

Depreciation Systems to Use with MACRS Depreciation

There are two main depreciation systems that taxpayers may use to depreciate property under
MACRS depreciation – the Alternative Depreciation System (ADS) and the General
Depreciation System (GDS). The system selected will determine the recovery period and
depreciation method to use. Generally, taxpayers are expected to use GDS, but there are
situations when the law requires them to use ADS or when taxpayers may elect to use the
ADS system.

Depreciation Methods Allowed Under GAAP

The main depreciation methods that are allowed under GAAP include the declining balance
method and the straight-line method of computing depreciation.
1. Declining balance method
The declining balance method provides greater deductions in the initial years of the asset’s
life and less in the later years of use.
2. Straight-line method
The straight-line method deducts the same amount each year except in the first year of
service and the last year of service when the asset is disposed of.
Problem Statement 1

The original value of a piece of equipment is $22,000, completely installed and ready for use.
Its salvage value is estimated to be $ 2000 at the end of a service life estimated to be 10
years. Determine the asset ( or book) value and depreciation of the equipment at the end of 5
years using a) Straight-line-method and b)Double-Declining-balance-method.

Solutions:-
1) By Straight Line Method

v = $22,000 Rs
vs
= $2,000 Rs
n= 10 year

d= V-Vs/n 2000
Asset value after 5 years = Va, where
a= 5
Va = V – ad $12,000

2) By using double declining balance method

d 2(undepreciated
= amount)/n

d
= Annual depreciation
n
= Service life

Depreciation
amount Book value
For year every Va =
Year year V(1-2/n)^a
Year
1 d= (100/10) 20 % 0.2 $4,400 17600

Year
2 d= (80/10) 16 % 0.16 $3,520 14080

Year d = (64/10) 12.8 % 0.128 $2,816 11264

3

Year
4 d= (51.2/10) 10.24 % 0.1024 $2,252.80 9011.2

Year
5 d= (40.96/10) 8.192 % 0.08192 $2,252.80 7208.96

Problem Statement 2
The original value of a Heat Exchanger equipment is Rs.35000, completely installed and
ready for use. Its salvage value is estimated to be Rs3000 at the end of a service life estimated
to be 7 years. Determine the asset ( or book) value and depreciation of the equipment at the
end of 6 years using ,a) Straight-line-method and b)Double-Declining-balance-method.

Solutions:-
1) By Straight Line Method

v = $35,000.00 Rs
vs
= $3,000 Rs
n= 7 year
d= V-Vs/n $4,571.43

Asset value after 5 years = Va, where

a=
R
Va = V - ad $7,571.43 s

2) By using double declining balance method

By using double declining balance

method
Annual
d= depreciation
n= Service life

(undepreciated
d= 2 amount)/n
undepreciated amount = 100
For year every year
Year Depreciation Book value (Va)
Depreciation amount
1 (%) =(V(1-2/n)^a)
d
1 28.57142857 % $10,000 $25,000.00
=
71.42857143
d
2 20.40816327 % $7,143 $17,857.14
=
51.02040816
d
3 14.57725948 % $5,102 $12,755.10
=
36.44314869
d
4 10.4123282 % $3,644 $9,110.79
=
26.03082049
d
5 7.437377283 % $2,603 $6,507.71
=
18.59344321
d
6 5.312412345 $1,859 $4,648.36
=

Conclusion:

The straight-line method is widely used for depreciation cost accounting because
it is very simple to apply, both to groups and single units, and it is acceptable for
cost-accounting purposes and for some income-tax determinations.

A double -declining balance depreciation method is an accelerated depreciation

method that can be depreciate the asset's value over the useful life. It is complex
than straight-line method.

References:

A Plant design and economics for chemical engineers, book by max stone peters.