ENGINEERING ECONOMY

DEPRECIATION
Depreciation – is the reduction or fall in the value of an asset, equipment or
physical property during the course of its working life. Excluded from this
definition are properties whose values increase with time like, antiques,
paintings, land, rare coins, rare stamps, etc.

STRAIGHT – LINE METHOD OF COMPUTING

DEPRECIATION COST NOTE: in this method of depreciation, the loss in value is
directly proportional to the age of the equipment or asset.

𝐶0 − 𝐶𝑛
𝑑= ; 𝐷 𝑚=𝑚𝑑 ; 𝐶 𝑚= 𝐶 0 − 𝐷𝑚
𝑛
EXAMPLE
A sawmill company purchases a new automated log planer for $95,000. The
asset is depreciated using a straight-line depreciation over a useful life of 10
years to salvage value of $5,000. the book value at the end of year six is
nearest to ____?
An asset is purchased for $9,000. It’s estimated economic life is 10 years after
which it will be sold for $1,000. find the total depreciation in the first 5 years
using straight line method.
 SINKING – FUND METHOD OF COMPUTING
DEPRECIATION COST
Sinking – fund method – is a technique for depreciating an asset while generating enough
money to replace it at the end of its useful life.
Let: d = periodic deposits equal to annual depreciation
NOTE: In this method of depreciation, it is
assumed that a sinking fund is established in
which funds will accumulate for replacement
purposes.

Capitalized Cost – is a cost that is incurred

from the purchase of a fixed asset that is
expected to directly produced an economic
benefit beyond one year or a company’s
operating cycle.

Future amount of annuity – is the value of a

group recurring payments at a certain date in the
future.
EXAMPLE:
A machine cost $10,000, has an estimated life of 10 years and a scrap value of
$1,500. Assuming no inflation and an interest rate of 4%, what uniform annual
amount must be invested at the end of the 10 – years in order to replace the
machine?
An equipment cost $100,000 with a salvage value of $5000 at the end of 10
years. Using sinking fund method, find the approximate book value after 3
years. Assume i = 4% per annum.
SUM OF THE YEARS DIGIT METHOD (SOYD) OF COMPUTING
DEPRECIATION COST (sometimes called SYD method)

Note: this method is based on the assumption that assets are generally more
productive when they are new and their productivity decreases as they become
old.
𝐷𝑚 =𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑚 𝑦𝑒𝑎𝑟𝑠
𝐶 𝑚 =𝐵𝑜𝑜𝑘𝑣𝑎𝑙𝑢𝑒 ( 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑎𝑓𝑡𝑒𝑟 𝑚 𝑦𝑒𝑎𝑟𝑠)

𝐷𝑚 = 𝑑1 + 𝑑 2+ 𝑑 3 +…+ 𝑑 𝑚
𝐶 𝑚 =𝐶 0 −+ 𝐷𝑚

1
𝑆𝑌𝐷 =1+2+ 3+ 4+5 +…+ 𝑛→ 𝑆𝑌𝐷 = ( 𝑛) (𝑛+1)
2
Depreciation for year 1 Example:

Depreciation for year 2 → 𝑑 2=(𝐶 0 −𝐶 𝑛 ) (

𝑛 −1
𝑆𝑌𝐷 ) 𝐷 3= ( 𝐶 0 − 𝐶 𝑛 )
[
10+ 9+8
𝑆𝑌𝐷 ]
;𝑖𝑓 𝑛=10

Depreciation for year 3 → 𝑑 3=(𝐶 0 − 𝐶𝑛 )

𝑆𝑌𝐷(
𝑛 −2
)
And so on… 𝐶 3 =𝐶 0 − 𝐷 3
EXAMPLE

A company purchased an asset for $10,000 and plans to keep it for 20 years. If
the salvage value is zero at the end of the 20th year, determine the depreciation
charge in the 3rd year using SYD.

An asset is purchased for $9,000. It’s estimated life is 10 years, after which it
will be sold for $1,000. Find the book value during the 3rd year if sum-of-year’s
digit (SOYD) depreciation is used.

[ ] [ ]
𝑛+ (𝑛 − 1 )+ ( 𝑛− 2 ) 10 +9+ 8
𝐷 3= ( 𝐶 0 − 𝐶 𝑛 ) =$ 9,000 − $ 1,000 = $ 3,927.27
𝑆𝑌𝐷 1
( 10 ) ( 10+1 )
2

𝐶 3 =𝐶 0 − 𝐷 3=$ 9,000 − $ 3,987.27=$ 𝟓 ,𝟎𝟕𝟐 .𝟕𝟑

SOLVE:
• A welding machine cost $45,000 has an estimated life of 5 years. Its salvage
value is $2,500. Find the depreciation rate using straight line method. A=
18.89%
• A dump truck was bought for $30,000 six years ago. It will have a salvage
value of $3,000 four years from now. It is sold now for $8,000. What is the
sunk cost if the depreciation method is sinking fund method at 6%?
A=$7711.52
• An equipment cost $7,000 has a life of 8 years. If the book value of the
equipment after 4 years is $2,197.22, compute the salvage value of the
equipment using SYD. A=$350
HOMEWORK
• An asset is purchased for $9,000. It’s estimated economic life 10 years, after
which it will be sold for $200. Find the total depreciation in its first three
years using straight-line method. A=$2,460
• An equipment costing $250,000 has an estimated life of 15 year with a book
value of $18,000. Compute its book value after 10 year using sinking fund
method. A=$132,622
• An asset is purchased for $9,000. its estimated life is 10 years, after which it
will be sold for $1,000. Using SOYD, find the total depreciation after 4
years. A=4,945