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Module 11 Depreciation
Module 11 Depreciation
Module 11 Depreciation
BV B
BV 1
D
Book Value
BV 2
BV 3
SV
0 1 2 3 4 Time n
5 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Straight Line Depreciation
B − SV
BV B Dt =
n
1
dt = d =
n
SV BVt = BVt −1 − Dt
B − SV
BVt = B − t
0 1 2 3 4 n n
Where:
t = year (t = 1, 2, 3, …n)
n = estimated service life
Dt = annual depreciation
dt = depreciation rate (the same for each year)
B = first cost / basis cost
BVt = book value at end of year t
SV = salvage value = BVn
therefore,
BVt = (1 − α ) B
t
B
Book Value
SLD
SYD
DDB
SV
0 1 2 3 4 5 6 n
10 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Exercise
A man just bought a Mercedes for Rp 675.000.000,-. He
expects to use that car for 6 years after which he hopes to
sell it for Rp 450.000.000,-
Calculate the book value of that piece of car each year for
the next six years using SLD, DB @ 175%, and SYD
EOY
methods SLD DB@175% SYD
Dt BVt Dt BVt Dt BVt
0
1
2
3
4
5
6
11 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Other Reduction in Values of Asset
UNITS - OF - PRODUCTION DEPRECIATION
COST METHOD :
This method is similar to the units-of-product depreciation method, where the depletion
charge is based on the amount of resources consumed and the initial investment.
example:
A coal mining site worth $ 3.5 billions is estimated to produce 20 million tons of
coal. Last year the mine produce 2,2 million ton of coal.
The unit depletion rate = $ 3.5 billions/20 million tons = $ 175 / ton
Depletion charge = 2.2 million to x $ 175/ton = $ 33 millions
PERCENTAGE METHOD :
This method is based on the application of a fixed percentage of depletion rate for
individual type of natural resource, e.g., oil, gas. copper, etc. (max charge is 50%)
example:
The fixed percentage of depletion for coal is 10%. The coal can be sold for $ 195
/ton.
The gross depletion income = 2.2 million tons x $ 195 /ton = $ 429 millions.
Depletion rate = 10% x $ 429 millions = $ 42.9 millions