DEPRECIATION

ES 6 – Engineering Economics
DEPRECIATION is a
reduction in the value of
an asset over time
CASH FLOW FOR DEPRECIATION
First Cost (FC) = the cost of
acquiring an asset
d = the annual
depreciation/ depreciation
charge
n = economic life
SV = salvage/ scrap/ junk
value
D = Total Accumulated
Depreciation
BV = Book Value
DEFINITION OF TERMS

➢ Depreciation – it is the decrease in the value of a fixed asset, or the value

of the physical property, over time.
➢ Value – is the present worth of all the future profits to be received
through the ownership of a particular property.
➢ Market Value of a Property – is the amount, which a willing buyer will
pay to a willing seller for the property where each has an equal
advantage and is under no compulsion to buy and sell.
DEFINITION OF TERMS

➢ Utility or Use Value of Property – is what the property is worth to

the owner as an operating unit.
➢ Fair Value – is the value which is usually determined by the
disinterested third party in order to establish a price that is fair to
both seller and buyer.
➢ Book Value – is the worth of the property as shown in the
accounting records of an enterprise. It is sometimes called
depreciated book value.
➢ Salvage or Resale Value – is the price that can be obtained from
the property after it has been used. Salvage Year is the year when
scrap value is equal to book value.
➢ Scrap Value or Junk Value – is the price that can be recovered if an
asset is disposed as junk.
PURPOSES OF DEPRECIATION

1. To provide for the recovery of capital, which has been invested

in physical property.
2. To enable the cost of depreciation to be charged to the cost of
producing products or services that result from the use of a
property.
CAUSES OF DEPRECIATION

➢ Physical Depreciation – it is due to wear and tear of the asset.

➢ Functional Depreciation – it is due to the obsolescence of the
asset.
➢ Depletion – refers to the decrease in the value of a property due to
the gradual extraction of its contents.
➢ Monetary Depreciation – depreciation due to changes in the price
level.
PHYSICAL AND ECONOMIC LIFE

➢ Physical Life of a Property – is the length of time during which it is

capable of performing the function for which it was designed and
manufactured.
➢ Economic Life or Useful Life – is the length of time during which the
property may be operated at a profit.
 METHODS USED TO
Depreciation

DETERMINE DEPRECIATION
Time Time-
Independent Dependent
Method Method

Uniform Non-Uniform
Hour Output
Methods Methods
Method

Service Output Straight Line Declining

Method Method Balance Method

Double
Sinking Fund
Declining
Method
Balance Method

METHODS USED TO Sum-of-Years’

Digit Method
DETERMINE DEPRECIATION
STRAIGHT LINE METHOD

The straight-line method is the simplest way of computing

depreciation. In this method, the depreciation each year is
constant, and the interest rate is being neglected.
Where:
𝐅𝐂 − 𝑺𝑽 FC = original cost/value
𝐝=
𝐧 SV = salvage value
BV = book value
𝑩𝑽 = 𝐅𝐂 − 𝐚 × 𝐝 d = depreciation/ annual depreciation
Dn = total depreciation after n years
n = economic life
𝐃𝐧 = 𝐝 × 𝐧 a = depreciable year
SAMPLE PROBLEMS
ON STRAIGHT LINE METHOD

1. A company bought a new laptop for Engr. Marquez.

The laptop was advertised to have an economic life of
8 years, and at that point, it would cost 10% of its
original price which is P35,000.00
a. Find the book value of the asset in its 4th year.
b. Compute for the total depreciation after 5 years.
SAMPLE PROBLEMS
ON STRAIGHT LINE METHOD

2. A machine has an initial cost of P100,000.00 and a

salvage value of P15,000.00 after 10 years. Find the
depreciation rate as a percentage of initial cost using
SLM.
SAMPLE PROBLEMS
ON STRAIGHT LINE METHOD

3. Calculate the depreciated value after 6 years of a

P10,000.00 machine having a useful life of 10
years and a salvage value of 10% of its original cost
at that time.
SAMPLE PROBLEMS
ON STRAIGHT LINE METHOD

4. A machine has an initial cost of P50,000.00 and

a salvage value of P10,000.00 after 10 years. What
is the straight line method of depreciation rate as
a percentage of the initial cost?
INDIVIDUAL ACTIVITY # 1

1. An asset is purchase for P500,000.00. The salvage value in 25years is P100,000.00. what is the
depreciation in the first 3 years using SLM. (Answer: P16,000.00)
2. A machine has a first cost of P13,000.00 and an estimated life of 15 years and the estimated value of
value of P1000.00. Using SLM, find the annual depreciation charge. (Answer: P800.00)
3. An engine has a fisrt cost of P450,000.00 and has an installation cost of P50,000. The estimated salvage
value is P50,000 after 10 years. Determine the total depreciation after 7 years. (Answer: P 315,000.00)
4. A factory equipment has an initial cost of 200,000. Its salvage value after 10 years is 20,000.00 As a
percentage of the initial cost, what is the straight line depreciation rate of the equipment. (Answer:
9%)
5. An air-conditioning unit was bought for P80,000.00 and a salvage value of P10,000 for 10years. Using
straight line, determine the book value after 6 years. (Answer: P 38,000.00)
6. A tax and duty-free importation of a 30hp sand mill cost P360,000.00. The bank charges P5,000.00 for
the brokerage and installation cost of P25,000. Other incidental expenses amounted to P20,000. The
salvage value of the mill is estimated to be P60,000 after 20 years. Find the appraisal value of the mill,
using a straight line depreciation, at the end of 10 years. (Answer: P 235,000.00)