Engineering Economics

Benha University 2022/2023

Faculty of Engineering At Shoubra
Mechanical Engg. Dept.(2nd Prod.) Assignment No. 4

Subject: Depreciation Models

[1] Assume that the ABC Company has purchased production equipment for $5,200.
The transportation costs (i.e., freight) and installation charges of the equipment are
$300 and $500, respectively. The useful life of the equipment is 5 years. Its resale
(salvage) value and cost of removal, at that time, are estimated to be $1,200 and $200,
respectively. Use the straight-line depreciation and determine the following:
a) First cost of the equipment.
b) Net salvage value of the equipment.
c) Annual depreciation charges for the equipment.
d) Book value of the equipment at the end of year 4.
e) Prepare a table giving a depreciation schedule and the corresponding book
values for the equipment.
f) Plot the book value versus useful life of the equipment.

[2] Air handling equipment that costs $12,000 has a life of 7 years with a $2000
salvage value.
(a) Calculate the straight line depreciation charge for each year.
(b) Determine the book value after 3 years.
(c) Determine the rate of depreciation.

[3] The “Big-Deal” Company has purchased new furniture for their offices at a retail
price of $125,000. An additional $20,000 has been charged for insurance, shipping,
and handling. The company expects to use the furniture for 10 years (useful life = 10
years) and then sell it at a salvage (market) value of $15,000. Use the SL method of
depreciation to answer these questions.
a) What is the depreciation during the second year?
b) What is the BV of the asset at the end of the first year?
c) What is the BV of the asset after 10 years?

[4] A lathe used in the manufacturing of precision machine parts costs $52,400. The
machine has a useful life of 10 years and a salvage value of $5,000. Using the double-
declining-balance method of depreciation, calculate (a) the declining balance rate, (b)
the depreciation charge after the third year, and (c) the book value after 7 years.

[5] Software and hardware for optimizing cell design of robotic picking lines have an
installed cost of $78,000 with no residual value after 5 years. For years 2 and 4, use

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DDB book depreciation to determine (a) the depreciation charge, and (b) the book
value.

[6] Determine the first cost of a machine that is used for making spill-containment
pallets if its book value in year 3 is $25,000. The machine has a 5-year life and the
double declining balance method is applied.

[7] A construction firm purchased a 5-year-old, 12-ton, pneumatic tired, self-propelled

earth roller for $7,950. The estimated life of the roller will be an additional 5 years; at
which time it can be sold for $1,000. The firm’s accountants are going to use sum-of-
years’ digits depreciation. Make a table of annual depreciation costs and book values
for the remaining life of the equipment.

[8] If P = $400,000, n = 6 years, and S is estimated at 15% of P for a new pavement

recycling machine, use the SYD method to determine (a) the book value after 3 years,
and (b) the rate of depreciation and the depreciation amount in year 4.

[9] A robot used in simulated car crashes cost $70,000, has no salvage value, and has
an expected capacity of tests not to exceed 10,000 according to the manufacturer.
Volvo Motors decided to use the unit-of-production depreciation method because the
number of test crashes per year in which the robot would be involved was not
estimable. Determine the annual depreciation and book value for the first 3 years if the
number of tests were 3810, 2720, and 5390 per year.

[10] An automatic control mechanism is estimated to provide 3,000 hours of service

during its life. The mechanism costs $5,200 and will have a salvage value of zero after
3,000 hours of use. What is the depreciation charge if the number of hours the
mechanism is used per year is (a) 600, (b) 1,300?

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