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1. Normal Depreciation Scrap Value (Junk Value) – the amount of the equipment
that can be sold for, when disposed off as a junk.
Physical Depreciation – due to the lessening of the
physical ability of a property to produce results. Its Depreciation Methods:
common causes are deterioration and wear.
Deterioration due to the effects of various chemical
and mechanical factors on the materials composing
the property. Wear and Tear due to abrasion, friction
between moving parts of equipment, impact vibration
or fatigue of the materials in the property, it is
determined by use rather than by age.
DEPRECIATION COST
Depreciation Cost – depends upon the physical or Figure 1: Methods used to determine Annual Depreciation
economic life of the equipment and its first cost. Cost
ENGINEERING ECONOMY
Other Methods Formulated in Recent Years:
Retirement Method
𝒏 𝑪𝒏 𝑳 𝑪𝑳
𝑫𝒏 = 𝒏𝒅 𝒌=𝟏− √ 𝒌=𝟏− √
𝑪𝑶 𝑪𝑶
𝑪𝒏 = 𝑪𝑶 − 𝑫𝒏
𝑪𝒏 = 𝑪𝑶 (𝟏 − 𝒌)𝒏
𝑪𝑳 = 𝑪𝑶 (𝟏 − 𝒌)𝑳
SINKING FUND METHOD
𝑪𝑶 − 𝑪 𝑳
In this method, it is assumed that a sinking fund is 𝒅𝒏 = ( ) (𝑸𝒏 )
𝑻
established in which funds will accumulate for replacement
purposes and will bear interest. The total depreciation which
ENGINEERING ECONOMY
It provides very rapid depreciation during the early d – the annual cost of depreciation
years of life of the property and therefore enables L – useful life of the property in years
faster recovery of capital. CO – original or first cost
CL – book value at the end of life of the property (salvage or
It is easier to use than the Matheson Formula. scrap value
Dn – depreciation up to n years
Properties can be depreciated to zero value. Cn – the book value at the end of n years
k – the ratio of depreciation in any year to the book value at
The basic assumption for the method is that the value the beginning of that year. This is constant throughout the
of the property decreases at a decreasing rate. life of the property.
𝑳−𝟏
𝟐𝒏𝒅 𝒀𝒆𝒂𝒓 = (𝑪𝑶 − 𝑪𝑳 ) ( )
∑ 𝒀𝒆𝒂𝒓𝒔
𝟏
𝑳𝒕𝒉 𝒀𝒆𝒂𝒓 = (𝑪𝑶 − 𝑪𝑳 ) ( )
∑ 𝒀𝒆𝒂𝒓𝒔
SERVICE-OUTPUT METHOD