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Lecture 10 Depreciation Methods

This document discusses three methods for calculating depreciation costs: straight-line, reducing balance (double declining balance), and sum of years digits. Straight-line depreciation evenly allocates the cost of an asset minus its salvage value over its useful life. Reducing balance uses a fixed rate to allocate larger depreciation costs earlier. Sum of years digits uses a fraction based on remaining life to allocate more costs earlier. Examples are provided to demonstrate calculating depreciation costs using each method over multiple years for various assets.

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Mohamed Khalil
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31 views

Lecture 10 Depreciation Methods

This document discusses three methods for calculating depreciation costs: straight-line, reducing balance (double declining balance), and sum of years digits. Straight-line depreciation evenly allocates the cost of an asset minus its salvage value over its useful life. Reducing balance uses a fixed rate to allocate larger depreciation costs earlier. Sum of years digits uses a fraction based on remaining life to allocate more costs earlier. Examples are provided to demonstrate calculating depreciation costs using each method over multiple years for various assets.

Uploaded by

Mohamed Khalil
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Fourth Year of Engineering

MEC 486: Project Planning


Lecture 10 : Depreciation Methods
Prof. Mohamed Ibrahim
Depreciation
• Depreciation is something that consumes the
value of that fixed asset with passage of time

• a reduction in the value of an asset over


time, due in particular to wear and tear.

• a decrease in the value of a currency relative


to other currencies.
Depreciation Methods
There are many methods to Calculate the
depreciation cost from them
• Straight-line Method
• Reducing balance Method
• Sum of years digits Method
Straight-Line Method
This method is a very common, and the simplest,
method of calculating depreciation expense.
In straight-line depreciation, the expense amount is
the same every year over the useful life of the asset.

Depreciation Formula for the Straight Line Method:


Depreciation Expense = (Price – Salvage value) / Useful life
Example
You bought an equipment by 200.000 EGP and the expected life is 10
years and the salvage value in the end is Zero. Calculate the
depreciation cost by straight line method.
• Solution
Price = 200.000 EGP, Useful life= 10 years, Salvage value= 0 EGP
• Depreciation Expense = (Price – Salvage value) / Useful life
• Then Dep. Cost = (200.000-0)/10 = 20.000 EGP / year
year 1 2 3 4 5 6 7 8 9 10
Dep. Cost 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000
Resale Value 180000 160000 140000 120000 100000 80000 60000 40000 20000 0

Dep. Cost Resale value


200000
25000
180000

20000 160000
140000
15000 120000
100000
10000 80000
60000
5000 40000
20000
0 0
0 2 4 6 8 10 12 0 2 4 6 8 10 12
Reducing balance Method
• Reducing Balance Method, also known as declining balance
depreciation, the depreciation is charged at a fixed rate.

• The declining balance method is an accelerated depreciation


system of recording larger depreciation expenses during the
earlier years of an asset’s useful life and recording smaller
depreciation expenses during the asset's later years.

• Depreciation Cost = Resale value * Dep. rate


Example
• Truck price 200.000 EGP. Calculate the depreciation cost by
double declining balance method if the useful life 10 years
and the salvage value at the end life equal zero.
Solution:
The dep. Cost by Straight line = 200.000/10 = 20.000 EGP/year
Then the normal dep. Rate = 20.000/200.000 =10% per year
Then the double declining rate = 10% * 2 = 20 % per year
From this point we can calculate the depreciation cost per year
as shown in the following table.
year 1 2 3 4 5 6 7 8 9 10
Dep. Cost 40000 32000 25600 20480 16384 13107 10486 8389 6711 5369
Resale Value 160000 128000 102400 81920 65536 52429 41943 33554 26844 21475

Resale value
Dep. Cost 180000
50000 160000
140000
40000
120000
30000 100000
80000
20000 60000
40000
10000
20000
0 0
0 2 4 6 8 10 12 0 2 4 6 8 10 12
Sum of years digits Method
The sum of years’ digits method is a form of accelerated
depreciation that is based on the assumption that the
productivity of the asset decreases with the passage of time.
Under this method, a fraction is computed by dividing the
remaining useful life of the asset on a particular date by the sum
of the year’s digits.

Depreciation Cost (i) = (n+1-i/N)* Price


Where
i: represents the year’s (i)
n: represents the useful life of the equipment.
N: represents to the sum of years = n(n+1)/2
Example
• Truck price 200.000 EGP. Calculate the depreciation cost by
sum of years digits method if the useful life 10 years and the
salvage value at the end life equal zero.
• Solution:
• Price= 200.000 EGP, n= 10, N=n(n+1)/2= 55
• D(i)= price*(n+1-i)/N
• Then
• D(1)= 200.000*(10+1-1)/55= 36364 EGP
• D(2)= 200.000*(10+1-2)/55= 32727 EGP
• D(3)= 200.000*(10+1-3)/55= 29091 EGP
• D(4)= 200.000*(10+1-4)/55= 25455 EGP
year 1 2 3 4 5 6 7 8 9 10
Depreciation cost 36364 32727 29091 25455 21818 18182 14545 10909 7273 3636
Resale value 163636 130909 101818 76364 54545 36364 21818 10909 3636 0

Dep. Cost Resale value


40000 180000
35000 160000

30000 140000
120000
25000
100000
20000
80000
15000
60000
10000 40000
5000 20000
0 0
0 2 4 6 8 10 12 0 2 4 6 8 10 12
200000
180000 Resale Value
160000
140000
120000
100000
80000
60000
40000
20000
0
0 2 4 6 8 10 12

S-L Method SOY Method DDB Method

45000
40000
Depreciation Cost
35000
30000
25000
20000
15000
10000
5000
0
0 2 4 6 8 10 12

S-L Method SOY Method DDB Method


Assignment
• You buy a car by 450.000EGP and the
expected useful life is 8 years Calculate the
Depreciation Cost for this car by three
methods and compare between them.
• The methods
Straight line method
Double declining method
Sum of year digits method
Thank you

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