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Econ 121 Module 7

This module covers depreciation methods in engineering economics, focusing on non-uniform methods such as the declining balance, double declining balance, and sum-of-the-years'-digit methods. It includes learning objectives, example problems, and assessment questions to help students understand and apply these concepts. The module concludes with references for further reading.

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14 views

Econ 121 Module 7

This module covers depreciation methods in engineering economics, focusing on non-uniform methods such as the declining balance, double declining balance, and sum-of-the-years'-digit methods. It includes learning objectives, example problems, and assessment questions to help students understand and apply these concepts. The module concludes with references for further reading.

Uploaded by

Senpai Tuazon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Engineering Economics | Econ 121

MODULE 7: DEPRECIATION: Non-Uniform Methods

Engr. Laurence A. Adviento


Instructor
Overview
Welcome! to the seven module of this course.

For this lesson, we will be discussing what is depreciation and the different types of
depreciation methods.
Learning Objectives
By the end of this module, you should be able to:
✓ Understand depreciation methods;
✓ Solve problems involving depreciation for declining balance method, double declining
balance method and sum-of-year’s digit method.
Depreciation Declining Balance Method
Declining balance method of depreciation is an
Uniform
1. Straight Line Method
accelerated depreciation method in which the
2. Sinking Fund Method depreciation expense declines with age of the fixed
asset.

Non-Uniform In declining balance, the depreciation charge gradually


1. Declining Balance decreases as it age. Greater depreciation and its early
Method years, while smaller depreciation will be recorded at its
2. Double Declining Balance
Method
later years.
3. Sum-of-the-Years’-Digit
Method
Recall Compound Interest Declining Balance Depreciation

P1,000 @ 10% interest yearly P1,000 @ 10% interest yearly

Year 0: 1,000 (Present Value) Year 0: 1,000 (First Cost)


Year 1: 1,000(1 + 0.10) = 1,100 Year 1: 1,000(1 - 0.10) = 900
Year 2: 1,100(1 + 0.10) = 1,210 Year 2: 900(1 - 0.10) = 810
Year 3: 1,210(1 + 0.10) = 1,331 Year 3: 810(1 - 0.10) = 729

𝑭=𝑷 𝟏+𝒊 𝒏 𝑩𝑽 = 𝑭𝑪 𝟏 − 𝒊 𝒏
Declining Balance Method

Where: k = annual rate of depreciation


Problem 1: Engineers Group of Companies decided to acquire a state-of-
the-art production machine that will cost P2,500,000. it will also require
another P50,000 for shipping and P65,000 for installation. Using standard
Declining Balance Method at 8% annual rate, find:
a) The depreciation cost for its 3rd year of use.
b) The accumulated depreciation after 6 years.
c) The salvage value if it is expected to last for 15 years.
Problem 2: Engineers Group of Companies decided to acquire a state-of-
the-art production machine that will cost P2,500,000. it will also require
another P50,000 for shipping and P65,000 for installation. Using standard
Declining Balance Method at 8% annual rate, find:
a) The depreciation cost for its 3rd year of use.
b) The accumulated depreciation after 6 years.
c) The salvage value if it is expected to last for 15 years.
Depreciation Double Declining Balance
Method
Uniform
1. Straight Line Method
2. Sinking Fund Method

Non-Uniform
1. Declining Balance
Method
2. Double Declining Balance
Method
3. Sum-of-the-Years’-Digit
Method
Recall Straight Line Method Double Declining Balance
Method
Co = P60,000, CL = P10,000, L = 5 years
Dn = Co – CL = 50,000 Co = P60,000, L = 5 years
Rate of Depreciation = 100%/L Rate of Depreciation = 200%/L

Year 0: 60,000 Year 0: 60,000


Year 1: 60,000 – 1/5(50,000) = 50,000 (10,000) Year 1: 60,000 – 2/5(60,000) = 36,000 (24,000)
Year 2: 50,000 – 1/5(50,000) = 40,000 (10,000) Year 2: 36,000 – 2/5(36,000) = 21,600 (14,000)
Year 3: 40,000 – 1/5(50,000) = 30,000 (10,000) Year 3: 21,600 – 2/5(21,600) = 12,960 (8,640)
Year 4: 30,000 – 1/5(50,000) = 20,000 (10,000) Year 4: 12,960 – 2/5(12,960) = 7,776 (5,184)
Year 5: 20,000 – 1/5(50,000) = 10,000 (10,000) Year 5: 7,776 – 2/5(7,776) = 4,665.6 (3,110.4)
Depreciation Double Declining Balance
Method
Uniform
1. Straight Line Method
2. Sinking Fund Method

Non-Uniform
1. Declining Balance
Method
Where: k = annual rate of depreciation = 200%/L
2. Double Declining Balance
Method When DDB method is used, the salvage value should not
3. Sum-of-the-Years’-Digit be subtracted from the first cost when calculating the
Method depreciation charge.
Problem 2: Determine the rate of depreciation, the total depreciation up to
the end of the 8th year and the book value at the end of 8 years for an asset
that costs P15,000 new and has an estimated scrap value of P2,000 at the
end of 10 years by (a) the declining balance method and (b) the DDB
method.
Depreciation Sum-of-the-Years’ Digit
(SYD) Method
Uniform
1. Straight Line Method
2. Sinking Fund Method

Non-Uniform
1. Declining Balance
Method
2. Double Declining Balance
Method
3. Sum-of-the-Years’-Digit
Method
For example, for a property whose life is 5 years.

Year Year in Reverse Depreciation Factor Depreciation During


Order the Year
Problem 3: A structure costs P12,000 new. It is estimated to have a life of 5
years with a salvage value at the end of life of P1,000. Determine the book
value at the end of each year of life.
Assessment Question
Problem 1. A machine costing P720,000 is estimated to have a life of 10
years. If the annual rate of depreciation is 25%, determine the total
depreciation using constant percentage of declining balance method.

Problem 2. An equipment costs P500,000 and has a salvage value of P25,000


after its 25 years of useful life. Using double declining balance method, what
will be the book value of the equipment at the end of 8 years?
Assessment Question
Problem 3. The corporation purchased a machine for P1 million. Freight and
installation charges amounted to 3% of the purchased price. If the machine
shall be depreciated over the period of 8 years with a salvage value of 12%.
Determine the depreciation charged during the 5th year and the book value
at the end of 5th year using the sum of the years’ digit method.
Activity
1. A construction company bought a concrete mixer truck at P1,700,000 and
is expected to last for 10 years. Using the double declining balance
method find the salvage value of the mixer truck.
References
1. Chan S. Park, Fundamentals of Engineering Economy, 3rd ed. Pearson Limited, 2013.
2. W.G. Sullivan, E.M. Wicks and C.P. Koelling, Engineering Economy, 6th ed., Pearson
Higher Education, Inc., 2015
3. L. Blank and A. Tarquin, Engineering Economy, 7th ed., McGraw-hill Companies, Inc.,
2012
4. Hipolito B. Sta. Maria; Engineering Economy; 3rd Edition
5. Veenciano I. Besavilla; Engineering Economics; 2nd Edition
End of Module 7
Thank you!

UTAK, TIWALA at DASAL

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