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Engineering

Economics & Project


Management
1 Introduction and basic
understanding

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For this week
n 1. The relationship between the basic
construction and the construction industry

n 2. The meaning for construction project


management

n 3. The category and meaning of economic


evaluation in construction project

n 4. The calculation method of depreciation


of fixed assets
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n 1. The relationship between the basic
construction and the construction industry
n 1.1 The concept of the basic construction
n 1.2 The contents of the basic construction
n 1.3 The roles of the basic construction
n 1.4 Classification of the basic construction
n 1.5 Fixed assets
n 1.6 The concept of the construction industry
n 1.7 Main sectors of the construction industry
n 1.8 The relationship between the basic
construction and the construction industry

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1.1 The concept of the basic
construction
n Simply described as: construction
companies use a variety of available
capital investment to expand
production capacity, improve the work
and life, thus to conduct construction
business activities including
construction, alteration, expansion,
etc. for factories, shops, houses,
schools, hospitals, railways, roads, etc.

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1.1 The concept of the basic
construction
n Also known as Capital Construction.

n Is a kind of economic activity of


investment

n Construction work, use certain materials,


machinery and equipment through the
acquisition, construction and installation
and other activities to turn those into fixed
assets, to form of new production capacity
or efficiency in to use.

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1.1 The concept of the basic
construction
n Traditionally described as: new
construction, reconstruction,
expansion, restoration projects and
work associated with it all related to
the extensive reproduction of fixed
assets. (we will talk about fixed
assets later)

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1.2 The contents of the basic
construction
n 1. Construction of fixed assets.

n 2.The purchase, use, disposal and ma


nagement of fixed assets.

n 3. Other basic construction work


(land acquisition, survey and design,
staff training, etc.)
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1.3 The roles of the basic
construction
n To provide production capacity for all
sectors of the national economy

n To create new infrastructure to improve


people's living standards

n Rational allocation of productive forces

n Using advanced technology to improve the


national economy
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1.4 Classification of the basic
construction

n From the nature of its investment


projects, can be divided into new
construction, reconstruction,
expansion, restoration projects.

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1.4 Classification of the basic
construction
Industrial construction

Agricultural and forestry water conservancy


meteorological construction
Productive
construction Post and telecommunications and transportation
construction

According to Commercial and material supply construction


investment purposes
Geological resource exploration and construction
etc.
Residential construction
Non productive
The construction of health, education building
construction
Public utility construction

etc.

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1.5 Fixed assets
n Buildings, factories, real estate and
railway etc. are good examples of fixed
assets.

n Fixed assets A long-term tangible


(not virtual) piece of property that a
certain company or firm owns and uses
in the production and is not expected to
be consumed or converted into cash any
sooner than at least one year's time.
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1.6 The concept of the construction
industry
n The construction industry is more basic to
our economy and our daily lives.

n The construction industry is a material


production sector which producing
construction products, and is an industry
which engaged in building production and
business activities.

n Construction is big business. It is the


nations largest single employer.

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1.7 Main sectors of the construction
industry

n 1.7.1 The residential sector

n 1.7.2 Building construction

n 1.7.3 Infrastructure and heavy


construction

n 1.7.4 Research and development


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1.7.1 The residential sector
n Including individual homes, small
condominiums, and apartment
complexes.

n Residential construction uses fairly


low technology.

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1.7.2 Building construction
n Including office buildings, large apartment
complexes, shopping malls, theaters,
schools, universities, and hospitals.

n The technical sophistication necessary for


success is greater than in the residential
sector.

n Require tight quality control .


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1.7.3 Infrastructure and heavy
construction
n Including roadways, bridges, canals, dams, and
tunnels, and so on.

n Infrastructure projects are publicly funded and


designed by civil engineers.

n It is built by heavy construction contractors which


are tend to be very large.

n Infrastructure projects tend to last for a long


time and to continue despite regional economic
ups and downs.
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1.7.4 Research and development
n There is little incentive for individual
companies to invest in research and
development.

n Most construction technologies are


not patentable.

n International companies are starting


to challenge these profiles.
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1.8 The relationship between the basic
construction and the construction industry

n relation n difference
the construction industry different nature
complete the main contents of BC: investment behavior, activity
the basic construction CI: material production sector
the basic construction
investment is the objective different content
needed to promote the BC: including construction engineering
construction industry and purchase of equipment which
completed by CI
CI: including BC investment formed
construction and installation task,
BC: basic construction renewal and maintenance task
CI: construction industry
different task
BC: the formation of fixed assets
CI: to provide construction products and
gain profit 18
n 2. The meaning for construction
project management
n 2.1 What is a project?
n 2.2 The characteristics of project
n 2.3 Project management
n 2.4 Construction project
n 2.5 Construction project
management
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2.1 What is a project?
n A project is a temporary work undertaken
to create a unique product or service.

n Example:
n A new building
n A wedding ceremony
n The introduction of a new computer
software in a company
n The development of a new car model
n The fusion of two companies

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2.1 What is a project?

n a task with a specified start and end time


n it requires the use of one or more resources
n has many activities that have to be done to
accomplish the task (or project)
n Those activities are: mutual independence,
mutual contact and mutual dependence

n For example: a birthday party. (buy cake, may


have flowers, may have balloons, send invitation,
site layout, etc.)

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2.2 The characteristics of project
n Has a unique and clear terminal target

n Has a definite beginning and a definite end

n Must be completed by a specific time

n Must be completed within budget

n Must be completed according to specification

n Constrained by limited resources

n For example: build a shopping mall (INCITY)

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2.2.1 An activity
n Is a defined piece of work.
n A project may has a number of
activities that must be completed in
some specified order or sequence.
n The sequence of the activities is
based on technical requirements, not
on management prerogatives.

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2.2.2 Activities
n Unique activities
n A project has never happened exactly in the same
way before, and it will never happen again under the
same conditions.

n Complex activities
n The activities that make up the project are not simple,
repetitive acts, such as build a house or design a user
interface for a software is a complex activity.

n Connected activities
n Connected implies that there is a logical or technical
relationship among activities. For example: usually
the main structure completed and the decoration start.

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2.2.3 Subprojects
n Very large or complex projects may be
divided into several subprojects, each of
which is a project in its own right.

n For example: project of a new University


Campus, the subprojects can be defined
as Administrative Building, Lecture
Building, Sports Hall, Dormitories etc.

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2.2.4 A program
n Is a collection of related projects and is
larger in scope than a single project.

n For example: a construction company


contracts a program for a new Metro-
network in the city.

n Unlike projects, programs can have many


goals, like the many project goal.
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2.2.5 The scope triangle
n The following 5 constraints operate
on every project:
n Scope
n Quality
n Cost
n Time
n Resources

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These constraints are interdependent from each other - a change in one constraint can
require a change in another constraint in order to keep balance of the project.
For every project, there 5 parameters should be in a certain balance.

For example: A foundation part of a certain building project, was originally complete
within 1 month, but now have to complete within half month, that usually means less
time, then more cost more resources (originally two piling machines, now 4 piling
machines) in order to complete.
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2.3 Project management
n Can be defined as: the art and science of
coordinating people, equipment, materials,
money, and schedules to complete a
specified project on time and within
approved cost
n From Garold D. Oberlender, Project
Management for Engineering and
Construction. McGraw-Hill International
Editions, Singapore 2000, P. 8

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2.3.1 Why Using Project
Management (PM)
n Achieve the project targets within the project
resources;

n Complex project elements (project parts, procedures,


sub-problems, activities ...) become clear, can be
controlled and better manageable;

n Better transparency in the project helps you to do the


right thing in the right time;

n Well defined project procedures reduce friction losses.

n For example: prepare to build the first floor (ground


floor by British) but did not finish the foundation part
so you can imagine
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2.3.2 Functions of PM
n 2.3.2.1 Planning
n 2.3.2.2 Organizing
n 2.3.2.3 Staffing
n 2.3.2.4 Directing
n 2.3.2.5 Controlling

n Just think about build a pyramid.


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2.3.2.1 Planning
n Is the formulation of a course of action to
guide a project to completion. It starts at
the beginning of a project, with the scope
of work, and continues throughout the life
of a project.
n There must be a clear operational plan to
guide the entire project, throughout its life.
The operational plan should be discussed
with all project parties and answer the
question who will do what at which time.
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2.3.2.2 Organizing
n Is the arrangement of resources in a
systematic manner to fit the project
plan. A project must be organized
around the work to be performed.
There must be a breakdown of the
work into tasks, subtasks, and work
packages.

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2.3.2.3 Staffing
n Is the selection of individuals who
have the experience to produce the
work for design, construction,
consultancy etc. the numerous
problems that arise throughout the
life of a project are solved by those
people.

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2.3.2.4 Directing
n Is the guidance of the work required
to complete a project. The individual
technical expertise must be
developed into an effective team. All
individuals must be collectively
directed in a common effort and in a
common direction.

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2.3.2.5 Controlling
n Predict and against the deviations then take
corrective actions

n Is the establishment of a system to measure,


report, and forecast deviations in the project
scope, budget, and schedule. The purpose of a
project control is to determine and predict
deviations in a project so corrective actions can
be taken. Project control requires the continual
reporting of information in a timely manner so
management can respond during the project
rather afterwards. Control is often the most
difficult function of a project management.

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2.4 Construction project
n Our projects normally deal with buildings.

n In architecture, construction, engineering,


real estate development and technology the
word project normally refers to a building.

n Such as:
n Any human-made structure used or intended
for supporting or sheltering, any use or
continuous occupancy or an act of construction.
n For example: apartment, a hospital etc.
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2.4.1 Building's life cycle
n Building's life cycle refers to the view of a building over the
course of its entire life.

Feasibility Analysis

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2.5 Construction project
management
n Under some conditions (time, money
etc.), take the construction project
as the object, to achieve the goal of
the peoject, based on the civil
engineering project responsibility
system, linked with contract,
systematic manage the construction
project by planning, organizing,
controlling etc.
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2.5.1 Who will join project?
n 2.5.1.1 Owners: public owners, private owners,
owner representatives

n 2.5.1.2 Design professionals: architects,


engineers

n 2.5.1.3 Construction professionals: Constructors,


Specialty contractors, material suppliers,
equipment suppliers

n 2.5.1.4 Other participants: financial institutions


and government agencies, insurance, lawyers

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2.5.1.1 Owners
n Owners can be individuals seeking a home
for their growing family, a large
organization responding to a change in
technology, a municipality seeking to
improve its infrastructure, or a developer
working to make benefit by filling a
perceived market need.

n To identify the need


n To financially back the project
n The source of that financing partly
defines the type of owner.
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2.5.1.1 Owners
n Public owners
n Construction is done with public
money

n Combines public funding with private


money

n Agencies represent the public


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2.5.1.1 Owners
n Private owners
n Construction is financed through private
ownership.

n Homeowner

n Multinational Company

n Developer

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2.5.1.1 Owners
n Owner representatives
n Facility managers are the most common
professional owner representatives.

n Outside consultants to manage construction


projects.

n A building committee is another form of owner


representation.

n The owners are primarily concerned about their


needs and their money----a scope of work and a
budget
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2.5.1.2 Design professionals
n Architects and engineers are the principle
designers of construction projects.

n Each professional contributes to projects


in different ways.

n Whether an architect or an engineer is the


lead designer depends on the nature of
the project.
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2.5.1.2 Design professionals
n Design professionals -Architects
n Architects are the stars of the building industry
n An architects responsibilities are to translate and
develop the owners requirements and graphically
represent them so that the contractor can
accurately price, schedule, and implement the
design.
n Architects are usually the principal designers on
building projects, but many other professionals
contribute to their work, including specification
writers, computer-aided design operators,
interior designers, and landscape architects.

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2.5.1.2 Design professionals
n Design professionals Engineers
n Engineers responsibility on projects is varied
depending on their major

n Engineers are regulated by professional licensing


requirements

n Engineers have many career options


n Structural engineers
n Mechanical engineers
n Electrical engineers
n Civil engineers
n Surveyors
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2.5.1.3 Construction professionals
n Constructors

n Specialty contractors

n Material suppliers

n Equipment suppliers

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2.5.1.3 Construction professionals
n Constructor
n Constructor is the general term used to
define the professional responsible for all
construction activities, whether she or he
works as a general constructor or a
construction manager.
n Construction offers many options.
n Estimators
n Schedulers
n Purchasing agents
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2.5.1.3 Construction professionals
n Specialty contractors
n Generally known as subcontractors,
these specialty firms include
mechanical, electrical, excavation,
and demolition contractors.

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2.5.1.3 Construction professionals
n Materials suppliers
n Materials and building components
are manufactured, fabricated, and
sometimes installed by suppliers.

n Suppliers have formed trade


associations that establish a level of
quality for each product and
standardize certain characteristics.
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2.5.1.3 Construction professionals
n Equipment suppliers
n The people who supply this equipment
offer it for sale or rent.

n A major difference between equipment


and material is that the equipment does
not become part of the project at the end.

n For example: for materials, concrete, steel


etc.
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2.5.1.4 Other participants
n Financial institutions and government
agencies

n Insurance

n Lawyers

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n 3. The category and meaning of
economic evaluation in construction
project
n 3.1 Construction project economic
evaluation
n 3.2 The composition of investment in
construction project
n 3.3 Sources of investment in
construction project
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3.1 Construction project economic
evaluation
n Construction project economic evaluation
is an important part of the project, and it
is an important means for project scientific
decision-making.

n The economic evaluation of productive


construction projects is divided into 2
types:
n 1. national economic evaluation (macro
evaluation).
n 2. enterprise economic evaluation (micro
evaluation)
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3.1 Construction project economic
evaluation
n For 1: national economic evaluation is based on
the whole national economy, and the national
analysis of the national benefit to carry out the
project.

n Based on the principles of rational allocation of


scarce resources and social economic sustainable
development, using national economic evaluation
parameter such as: shadow price, social discount
rate, from the overall situation of the national
economy, analyze the economic rationality of
construction projects

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3.1 Construction project economic
evaluation
n For 2: enterprise economic evaluation
(financial evaluation) is based on the
project itself as an independent system,
analysis of the project's profitability.

n According to the current national tax


system, price system, analyze the benefits
and costs of the construction project from
the perspective of project finance, analyze
the financial feasibility of the project by
profitability analysis and solvency analysis
etc.
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3.1 Construction project economic
evaluation

n successful project means:

n advanced technology

n reasonable economic
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3.1 Construction project economic
evaluation
n Content of project economic evaluation:

n 1. analysis on the rationality of investment direction


through economic evaluation
n to ensure that the limited funds can achieve the greatest
economic effect

n 2. analysis of the optimal way to achieve the overall goal


n list all possible plans
n based on the evaluation of economic effects
n reasonable coordinate of technology and economy

n 3. analysis of the capital resource of the project


n capital financing
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3.2 The composition of investment in
construction project
n 1. Basic construction investment (for example the
railway station)after the completion of the
project, most parts of the project become the
fixed assets for the enterprise.

n Costs including:
n construction cost
n equipment purchase cost
n Equipment installation cost
n expenses for tools, etc.
n other costs: land acquisition, survey design,
personnel training, etc.

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3.2 The composition of investment in
construction project
n 2. Working capital the money
needed in order to organize the
production

n wages, material purchase fee etc.

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3.3 Sources of investment in
construction project
n 1. financial allocation: from state or local
government

n 2. bank loan: borrow money from the


bank, need interest

n 3. self-financing: issuing stocks, bonds,


etc.

n 4. foreign capitals: joint venture, etc.


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n 4. The calculation method of depreciation of fixed
assets
n 4.1 Straight-line depreciation
n 4.1.1 Meaning
n 4.1.2 Example 1
n 4.1.3 Formula
n 4.1.4 Example 2
n 4.2 Workload method
n 4.2.1 Meaning
n 4.2.2 Example 3
n 4.2.3 Formula
n 4.2.4 Example 4
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n 4.3 Double declining balance method DDB
(accelerate depreciation method 1)
n 4.3.1 Meaning
n 4.3.2 Example 5
n 4.3.3 Formula
n 4.3.4 Example 6
n 4.4 Sum of the years digits method (accelerate
depreciation method 2)
n 4.4.1 Meaning
n 4.4.2 Example 7
n 4.4.3 Formula
n 4.4.4 Example 8

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4. The calculation method of
depreciation of fixed assets

n Depreciation The reduction in the


value of an asset due to usage,
passage of time, wear and tear,
technological outdating or other such
factors. Part of the cost.

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4.1 Straight-line depreciation
n 4.1.1 Meaning

n 4.1.2 Example 1

n 4.1.3 Formula

n 4.1.4 Example 2

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4.1.1 Meaning
n Method for average amount of
depreciation in the estimated service
life for a fixed asset.

n Characteristic: the annual


depreciation rate and the
depreciation amount per year are the
same every year (service life).
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4.1.2 Example 1
n Supposes certain ordinary equipment in
certain construction site, the original value
is 25000, expected to use 10 years, the
estimated residual value is 1500, the
cleaning costs is 500, please calculate:
(Use straight-line depreciation)
n 1. annual depreciation of that equipment;
n 2. annual depreciation rate;
n 3. monthly depreciation rate;
n 4. depreciation amount per month.
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4.1.2 Example 1
n For 1:
n annual depreciation =[25000 (1500 - 500)] /
10=2400
n For 2:
n annual depreciation rate = 2400/25000 X 100%
= 9.6%
n For 3:
n monthly depreciation rate = 9.6% / 12 = 0.8%
n For 4:
n depreciation amount per month = 0.8% X 25000
= 200

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4.1.3 Formula
n 1. annual depreciation of fixed asset = (original value of fixed
asset net residual value of fixed asset) / service lives
(depreciable lives)

n Note: the fixed assets usually service more then one year's time,
so service lives (depreciable lives). Remember when we describe
fixed assets before.

n 2. net residual value of fixed asset = residual value of fixed asset


cleaning costs

n 3. annual depreciation rate = (annual depreciation of fixed asset /


original value of fixed asset) X 100%

n 4. monthly depreciation rate = annual depreciation rate / 12

n 5. depreciation amount per month = monthly depreciation rate X


original value of fixed asset
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4.1.4 Example 2
n Supposes another certain ordinary
equipment in another certain
construction site, the original value is
20000, expected to use 8 years, the
net salvage is 5%, please use
straight-line depreciation to calculate
annual depreciation of that
equipment.

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4.1.4 Example 2
n annual depreciation = 20000 X (1
5%) / 8 = 2375

n Formula
n 6. annual depreciation of fixed asset
= original value of fixed asset X (1 -
net salvage) / service lives
(depreciable lives)
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4.2 Workload method
n 4.2.1 Meaning

n 4.2.2 Example 3

n 4.2.3 Formula

n 4.2.4 Example 4

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4.2.1 Meaning
n Method of calculating depreciation
according to the actual working
hours or the proportion of completed
work or workload measure units.

n Characteristic: relatively simple.

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4.2.2 Example 3
n Supposes a lager construction machine in
a certain construction site, the original
value is 200K, the estimated net residual
value is 3K, can be used 2K workload
measure units as estimated.
n Please use workload method to calculates:
n 1. depreciation value per measure unit;
n If this machine has been used 30
workload measure units this month.
n 2. depreciation value of this month.
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4.2.2 Example 3
n For 1:
n depreciation value per workload
measure unit = (200K - 3K) / 2K =
98.5

n For 2:
n depreciation value of this month =
30 X 98.5 = 2955
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4.2.3 Formula
n 1. depreciation value per workload measure unit
= (original value of fixed asset - estimated net
residual value) / total workload measure units

n 2. monthly depreciation = actual used workload


measure units (for month) X depreciation value
per workload measure unit

n 3. annual depreciation = actual used workload


measure units (for year) X depreciation value per
workload measure unit

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4.2.4 Example 4
n Supposes another lager construction
machine in another certain construction
site, the original value is 1200K, the
estimated net residual value is 30K, can
be used 300K workload measure units as
estimated.
n Please use workload method to calculates:
n 1. depreciation value per measure unit;
n If this machine has been used 50K
workload measure units this year.
n 2. depreciation value of this year.

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4.2.4 Example 4
n For 1:
n depreciation value per workload
measure unit = (1200K - 30K) /
300K = 3.9

n For 2:
n depreciation value of this year =
3.9 X 50K = 195K
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4.3 Double declining balance method
(accelerate depreciation method 1)
n 4.3.1 Meaning

n 4.3.2 Example 5

n 4.3.3 Formula

n 4.3.4 Example 6

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4.3.1 Meaning
n Calculation based on net value and fixed
depreciation rate, its depreciation rate is 2
times of the straight-line depreciation, is
one of the accelerate depreciation method
(another one is sum of the years digits
method which we will talk about later).

n Characteristic: the depreciation rates are


the same except the final 2 years, while
the annual depreciation values are
different except the final 2 years.
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4.3.2 Example 5
n Supposes certain construction site have a
high-tech equipment, the original value is
40K,expected to use 5 years, the
estimated net residual value is 2K, the
cleaning costs is 400, please calculates:
(Use double declining balance method)
n 1. annual double straight line depreciation
rate
n 2. the amount of depreciation for the first
year, the second year and the third year;
n 3. the amount of depreciation for the
fourth year and the fifth year.
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4.3.2 Example 5
n For 1:
n annual double straight line depreciation rate
= 2/5 X 100% = 40%

n For 2:
n the amount of depreciation for the first year
= 40K X 40% = 16K
n the amount of depreciation for the second
year = (40K 16K) X 40% = 9600
n the amount of depreciation for the third year
= (40K 16K - 9600) X 40% = 5760
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4.3.2 Example 5
n For 3:
n net book value of the fixed asset =
original value of fixed asset -
accumulated depreciation in certain
year
n 8640= 40000 16000 9600 5760

n the amount of depreciation for the


fourth year and the fifth year =
[(40000 16000 9600 - 5760)
(2000 - 400)] / 2 = 3520
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4.3.3 Formula
n 1. annual double straight line depreciation rate = (2 /
estimated service lives) X 100%

n 2. annual depreciation =net value of fixed asset X annual


depreciation rate

n 3. depreciation of the final 2 years = (net book value of the


fixed asset - estimated net residual value) / 2

n Or
n 4. depreciation of the final 2 years = (net book value of the
fixed asset - original value of fixed asset X net salvage) / 2

n Note: net book value of the fixed asset simply means:


original value of fixed asset - accumulated depreciation in
certain year
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4.3.4 Example 6
n Supposes another certain construction site have
another high-tech equipment, the original value
is 2500K ,expected to use 10 years, the net
salvage is 5%, please calculate: (Use double
declining balance method) round numbers, no
decimal point, for example: 4.8 5.
n 1. annual double straight line depreciation rate
n 2. the amount of depreciation for every year.

n Note: in this case, when using double declining


balance method to calculate the depreciation,
regardless of the net salvage until the last 2
years.

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4.3.4 Example 6
n For 1:
n annual double straight line depreciation rate = (2 / 10) X 100% =
20%

n For 2:
n Unit: K

n For the final 2 years:


n 419 = 2500 - 500 - 400 - 320 - 256 - 205 - 164 - 131 - 105
n After get 419,
n (419 - 25005%) / 2 = 147K
n 419 - 147= 272
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Attention
n This PPT is only for class
instruction.

n Not for any commercial


purpose!

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