Lecture 15, Week 11

Engineering Economics
 Depreciation
• A reduction in the value of an asset over time,
due in particular to wear and tear.
• It is an accounting method that represents
how much of an asset's value has been used
up.
• Companies can take a tax deduction for the
cost of the asset, meaning it reduces taxable
income.
 Basic Terminologies

• Cost Basis or Basis (B)

– The initial cost of acquiring an asset (purchase price
plus any sales tax)
• Book Value (BV)
– The worth of a depreciable property or asset as
shown on the accounting records of a company
• Salvage Value (SV)
– The estimated value of an asset at the end of its
useful life
• Useful Life
– The expected (estimated) period that an asset or
property will be used in a trade business to produce
income
 Depreciation Methods
• Straight-Line (SL) Method
• Declining Balance (DB) Method
• Modified Accelerated Cost Recovery System
(MACRS)
• Sum of Years Digits Method (SYD) Optional
 Straight-Line (SL) Method
• SL depreciation is the simplest depreciation method. It assumes that
a constant amount is depreciated each year over the depreciable
(useful) life of the asset
• N = depreciable life (recovery period) of the asset in years;
• B = cost basis, including allowable adjustments;
• dk = annual depreciation deduction in year k(1 ≤ k ≤ N);
• BVk = book value at end of year k;
• SVN = estimated salvage value at end of year N; and
• dk* = cumulative depreciation through year k,
dk = (B-SVN)/N
dk*= k.dk
BVk = B - dk*
• You must have an estimate of the final SV, which will also be the final
BV at the end of year N.
Declining-Balance (DB) Method
Questions???