University of Bahrain

College of Engineering
Department of Mechanical Engineering

CHAPTER 1 6 MENG 300

S2 , 2022 / 2023

Depreciation
Methods
Dr. Saraa Al -asadi
s a l a s a d i@u o b .e d u .b h

b y Q a s Al a s a d i
Purpose Learning Sections
Outcomes

CONTENT
Chapter Tutorial
Summary Session
Purpos e
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Purpose

Use depreciation or
depletion methods
to reduce the book
value of a capital
investment in an
asset or natural
resource.
Le arning
Outcome s
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Page 02 of 15
 Learning Outcomes
TOPIC SECTION OUTCOME

Define and use the basic terms of asset

Terminology 16.1 depreciation.

Apply the straight line (SL) method of

Straight line 16.2 depreciation.

Apply the declining balance (DB) and

Declining balance 16.3 double declining balance (DDB) methods
of depreciation.
 16.1
De pre ciation
Te rminology
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 16.1 Depreciation Terminology
Depreciation

1 Is a book method (noncash) to represent the

reduction in value of a tangible asset.

2 The method used to depreciate an asset is a way

to account for the decreasing value of the asset
to the owner and to represent the diminishing
value (amount) of the capital funds invested in it.

3 The annual depreciation amount is not an actual

cash flow, nor does it necessarily reflect the actual
usage pattern of the asset during ownership.
 16.1 Depreciation Terminology
Depreciation
First cost P or unadjusted basis B : is the delivered and installed cost of the asset including purchase price,
delivery and installation fees, and other depreciable direct costs incurred to prepare the asset for use.

Book value BVt : represents the remaining, undepreciated capital investment on the books after the
total amount of depreciation charges to date has been subtracted from the basis.

Recovery period n : is the depreciable life of the asset in years.

Market value MV : a term also used in replacement analysis, is the estimated amount realizable if the
asset were sold on the open market. Because of the structure of depreciation laws, the book value and
market value may be substantially different.

Salvage value S : is the estimated trade -in or market value at the end of the asset ’s useful
life .(percentage of the first cost)

Depreciation rate or recovery rate dt : is the fraction of the first cost removed by depreciation each
year t . This rate may be the same each year, which is called the straight line rate d
 16.1 Depreciation Terminology

Straight line (SL)

Asset ’s value decrease linearly
with time

Depreciation
Models
Declining balance(DB)
Asset ’s value decrease according
to a fixed percentage
 16.2
Straight Line (SL)
De pre ciation
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 16.2 Straight Line (SL) Depreciation

dt The depreciation rate is the same (

(t = 1, 2, . . . , n) of the recovery period n.
1∕
n) each year
dt =
𝟏𝟏
𝒏𝒏
n recovery period .

Dt
𝑩𝑩 − 𝑺𝑺
annual depreciation amount (charge) D t = (B − S)d t =
𝒏𝒏
B first cost or unadjusted basis

S estimated salvage value

BV t annual depreciation amount (charge) BV t = B − t D t

 6.2 Calculation of Capital Recovery and AW
Values Example 16.1

If an asset has a first cost of $50,000 with a $10,000 estimated salvage value after 5 years,
(a) calculate the annual depreciation, and (b) calculate and plot the book value of the asset after
each year, using straight line depreciation.

B = 50,000
Givens S = 10,000
n= 5
a)

b ) BV t = B − t D t
 16.3
De clining Balance (DB) and
Double De clining
Balance (DDB)
De pre ciation
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 16.3 Declining Balance (DB) and Double
Declining Balance (DDB) Depreciation

DB DDB
𝟐𝟐𝟐𝟐𝟐𝟐 𝟏𝟏
𝟏𝟏𝟎𝟎𝟎𝟎 𝟏𝟏 d max = ( )
dt = 𝟏𝟏𝟏𝟏𝟏𝟏 𝒏𝒏
𝟏𝟏𝟏𝟏𝟏𝟏 𝒏𝒏

- BV t = BV 𝒕𝒕 − 𝟏𝟏 D t = (d) BV 𝒕𝒕 − 𝟏𝟏

If imp S > estim S , the asset is not fully depreciated

If imp S < estim S , the asset is fully depreciated

 16.3 Declining Balance (DB) and Double
Declining Balance (DDB) Depreciation
Example 16.2
Underwater electroacoustic transducers were purchased for use in SONAR applications.
The equipment will be DDB depreciated over an expected life of 12 years. There is a
first cost of $25,000 and an estimated salvage of $2500. n
B S
(a)Calculate the depreciation and book value for years 1 and 4. Write the spreadsheet
functions to display depreciation for years 1 and 4.
(b) Calculate the implied salvage value after 12 years.

a)
b)

imp S = $ 2803 > estim S = $2500

, the asset is not fully depreciated
 16.3 Declining Balance (DB) and Double
Declining Balance (DDB) Depreciation
Example 16.3
Freeport-McMoRan Copper and Gold has purchased a new ore grading unit for $80,000.
The unit has an anticipated life of 10 years and a salvage value of $10,000. Use the DB and
DDB methods to compare the schedule of depreciation and book values for each year. Solve
by hand and by spreadsheet.
B = 80,000
Givens S = 10,000
n = 10

DB)

DDB)
𝟐𝟐𝟐𝟐𝟐𝟐 𝟏𝟏
d = = 𝟎𝟎. 𝟐𝟐
𝟏𝟏𝟏𝟏𝟏𝟏 𝟏𝟏𝟏𝟏
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