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14 views

Group 1

Uploaded by

cidvillaceran
Copyright
© © All Rights Reserved
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Engineering Economics:

Depreciation
GROUP 1
AHIT
DOTE
LANESTOSA
NONOL
SEÑERES
What is Depreciation?

Depreciation refers to the allocation of the


initial cost of a capital asset over its useful life.
This process recognizes that assets like
machinery, equipment, buildings, and
infrastructure gradually lose value due to wear
and tear, obsolescence, or technological
advancements.
Importance of Depreciation in Engineering
Economics.
Depreciation is a fundamental concept in
engineering economics that influences financial
reporting, project evaluation, tax planning, asset
management, risk management, and regulatory
compliance.

Its proper application ensures that engineering


projects are financially sound, assets are
efficiently managed, and organizations can make
informed decisions to achieve long-term
sustainability and success.
Example of areas where depreciation is
commonly applied.
 Business Accounting
 Taxation
 Financial Reporting
 Project Evaluation and Capital Budgeting
 Asset Management
 Insurance and Risk Management
 Regulatory Compliance
Types of Depreciation
• Physical Depreciation - refers to the decline in the physical
condition or usefulness of a tangible asset over time. It is
one of the components of depreciation that reflects the wear
and tear, deterioration, or obsolescence of the asset due to
factors such as age, usage, weathering, and inadequate
maintenance.

• Functional Depreciation - refers to the reduction in the


usefulness or efficiency of a tangible asset due to factors
other than physical wear and tear. Unlike physical
depreciation, which primarily focuses on the asset's
condition and structural integrity, functional depreciation
pertains to its ability to perform its intended function
effectively.
Methods of Computing Depreciation

• Straight-Line Method
• Declining Balance Method
• Sinking Fund Method
• Sum-of-Years’-Digits Method
Straight-Line
Method
Is a method
used to allocate the
cost of an asset
over its useful life
by setting aside Where: D = Annual Depreciation
FC = First Cost
funds in a sinking SV = Salvage Value
N = Economic Life

fund to accumulate
a sum sufficient to
replace the asset
when it reaches the
end of its useful life.
Example
1. What is the value of an asset after 8 years of use if it
depreciates from its original value of P120,000 to its
salvage value of 3% in 12 years?

2. A man bought an equipment which cost P524,000. Freight


and installation expenses cost him P31,000. If the life of
the equipment is 15 years with an estimated salvage value
of P120,000, find its book value after 8 years.

3. The cost of equipment is P500,000 and the cost of


installation is P30,000. If the salvage value at the end of 5
years is 10% of the cost of equipment, determine the
book value at the end of the 4 year. Use straight line
method.
Sinking Fund
Method
Is a method
used to allocate the
cost of an asset
over its useful life
by setting aside
funds in a sinking Where: D = Annual Depreciation
FC = First Cost

fund to accumulate SV = Salvage Value


N = Economic Life

a sum sufficient to
replace the asset
when it reaches the
end of its useful life.
Example
1. An equipment costing P250,000 has an estimated life of 15
years with a book value of P30,000 at the end of the period.
Compute the depreciation charge and its book value after 10
years using sinking fund method assuming i= 8%.

2. A certain machinery costs P50,000 last 12 years with a


salvage value of P5,000. Money is worth 5%. If the owner
decides to sell it after using it for 5 years, what should his
price be so that he will not lose or gain financially in the
transaction? Use sinking fund method of depreciation.

3. A machine costs P80,000 and has an estimated salvage value


of P20,000 at the end of 20 years useful life. Compute the
book value at the end of he 2nd year using sinking fund
method of depreciation based on 8% interest rate.
Declining Balance
Method
Is a method
used in accounting
to allocate the cost
of a tangible asset
over its useful life at
an accelerated rate.
Example
1. An equipment costing P250,000 has an estimated life of
15 years with a book value of P30,000 at the end of the
period. Compute the depreciation charge and its book
value after 10 years using declining balance method.

2. A certain equipment has a first cost of P20,000 and


salvage value of P1,000 at the end of 10 years. Determine
its book value at the end of 6 years using declining
balance method.

3. A radio service panel truck initially cost P56,000.00. Its


resale value at the end of the 5th year of the useful life is
estimated at P15,000.00. By means of the declining
balance method, determine the depreciation charge for
the 2nd year.
Sum-of-Years’-Digits
Method
Is a method
used in accounting
to allocate the cost
of a tangible asset
over its useful life.
Example
1. An equipment costing P250,000 has an estimated life of
15 years with a book value of P30,000 at the end of the
period. Compute the depreciation charge and its book
value after 10 years using the sum of years’ digit method.

2. A company an asset for P100,000 and plans to keep it for


20 years. If the salvage value is zero at the end of 20th
year, what is the depreciation in the third year? Use sum
of years’ digits method.

3. A machine costs P80,000 and has an estimated salvage


value of P20,000 at the end of 20 years useful life.
Compute the book value of the machine after two years
using SOYD method.

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