ENGINEERING

ECONOMY

COURSE CODE: BES211

LEC: 3 Units
DEPRECIATION
DECLINING BALANCE METHOD
THE SUM OF THE YEARS DIGITS
METHOD (SYD)

THE SERVICE OUTPUT METHOD

DEPRECIATION METHODS
We shall use the following symbols for the different depreciation
methods

𝐨
𝐋
(including gain or loss due to removal)

𝐧
𝐧
DECLINING BALANCE METHOD
Declining Balance Method
In this method, sometimes called the CONSTANT PERCENTAGE
METHOD or the MATHESON FORMULA, it is assumed that the annual cost
of depreciation is a fixed percentage of the salvage value at the beginning
of the year.

The ratio of the depreciation in any

year to the book value at the beginning of the
year is constant throughout the life of the
property and is designated by , the rate of
depreciation.
Declining Balance Method
𝐂𝟎 𝐂𝟏 𝐂𝟐 𝐂𝟑 𝐂𝐧 𝟏 𝐂𝐧 𝐂𝐋 𝟏 𝐂𝐋

𝟎 𝟏 𝟐 𝟑 𝐧−𝟏 𝐧 𝐋−𝟏 𝐋

𝐝𝟏 𝐝𝟐 𝐝𝟑 𝐝𝐧 𝐝𝐋

𝐧 𝟏
Year Book Value at Depreciation Book Value at the end of year 𝐧 𝟎
beginning of year during the year
𝐧
𝟏 𝐂𝟎 𝐝𝟏 = 𝐤𝐂𝟎 𝐂𝟏 = 𝐂𝟎 − 𝐝𝟏 = 𝐂𝟎 (𝟏 − 𝐤) 𝐋
𝐧 𝐋
𝐧 𝟎 𝟎
𝟐 𝐂𝟎 𝟏 − 𝐤 𝐝𝟐 = 𝐤𝐂𝟏 𝐂𝟐 = 𝐂𝟏 − 𝐝𝟐 = 𝐂𝟎 (𝟏 − 𝐤)𝟐 𝟎
𝟑 𝐂𝟎 𝟏 − 𝐤 𝟐 𝐝𝟑 = 𝐤𝐂𝟐 𝐂𝟑 = 𝐂𝟐 − 𝐝𝟑 = 𝐂𝟎 (𝟏 − 𝐤)𝟑
𝐋
- - - - 𝐋 𝟎

𝐧 𝐂𝟎 𝟏 − 𝐤 𝐧 𝟏 𝐝𝐧 = 𝐤𝐂𝐧 𝟏 𝐂𝐧 = 𝐂𝐧 𝟏 − 𝐝𝐧 = 𝐂𝟎 (𝟏 − 𝐤)𝐧
𝐧 𝐧 𝐋 𝐋
- - - -

𝐋 𝐂𝟎 𝟏 − 𝐤 𝐋 𝟏 𝐝𝐋 = 𝐤𝐂𝐋 𝐂𝐋 = 𝐂𝐋 − 𝐝𝐋 = 𝐂𝟎 (𝟏 − 𝐤)𝐋 𝐋 𝟎
𝟏 𝟏
Declining Balance Method
𝐧 𝟏
𝐧 𝟎
𝐧
𝐋
𝐧 𝐋
𝐧 𝟎 𝟎
𝟎

𝐋
𝐋 𝟎

𝐧 𝐧 𝐋 𝐋
𝐋 𝟎

This method does not apply, if the salvage value is zero,

because will be equal to one and 𝟏 will be equal to 𝟎
Example Problem:
A certain type of machine loses 10% of its value each year. The machine costs P2,000.00 originally. Make
out a schedule showing the yearly depreciation, the total depreciation and the book value at the end of
each year for 5 years.

Solution:

Book value at Depreciation during Total Depreciation Book Value at

Year beginning of year the year 10% at end of year end of year

1 P2,000.00 P200.00 P200.00 P1,800.00

2 1,800.00 180.00 380.00 1,620.00

3 1,620.00 162.00 542.00 1,458.00

4 1,458.00 145.80 687.80 1,312.20

5 1,312.20 131.22 819.12 1,180.98

DOUBLE-DECLINING
BALANCE METHOD
Double-Declining Balance (DDB) Method
This method is very similar to the declining balance method except that
the rate of depreciation is replaced by .

𝟐 𝐧 𝟏𝟐
𝐧 𝟎 𝐋 𝐋

𝐧 𝟎

𝐋 𝟎

When the DDB method is used, the salvage value should not be
subtracted from the first cost when calculating the depreciation charge.
Example Problem:
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 double declining balance method.

Solution:
(a) Declining Balance Method
𝐂𝟎 = 𝐏𝟏𝟓, 𝟎𝟎𝟎
𝐂𝐋 = 𝐏𝟐, 𝟎𝟎𝟎
𝐋 𝟏𝟎
𝐋 = 𝟏𝟎 𝐋
𝐧=𝟖 𝟎

𝐧 𝟖
𝐧 𝟎

𝐧 𝟎 𝐧
Continuation:
Solution:
(b) Double-Declining Balance Method
𝐂𝟎 = 𝐏𝟏𝟓, 𝟎𝟎𝟎
𝟐 𝟐
𝐂𝐋 = 𝐏𝟐, 𝟎𝟎𝟎 𝐑𝐚𝐭𝐞 𝐨𝐟 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 = = = 𝟎. 𝟐𝟎 𝐨𝐫 𝟐𝟎%
𝐋 = 𝟏𝟎 𝐋 𝟏𝟎
𝐧=𝟖 𝟖
𝐧

𝐧 𝟎

𝐧 𝟎 𝐧
Example Problem:
A plant bought a calciner for P220,000 and used it for 10 years, the life span of the equipment. What is
the book value of the calciner after 5 years of use? Assume a scrap value of P20,000 for straight line
method; P22,000 for textbook declining balance method and P20,000 for the double declining balance
method.
(a) Straight line Method 𝐂𝐋 = 𝐏𝟐𝟎, 𝟎𝟎𝟎
Solution:
𝐂𝟎 = 𝐏𝟐𝟐𝟎, 𝟎𝟎𝟎 𝐧 𝐂𝐎 − 𝐂𝐋 𝟓 𝐏𝟐𝟐𝟎, 𝟎𝟎𝟎 − 𝐏𝟐𝟎, 𝟎𝟎𝟎
𝐃𝐧 = = = 𝐏𝟏𝟎𝟎, 𝟎𝟎𝟎
𝐋 = 𝟏𝟎 𝐋 𝟏𝟎
𝐧=𝟓
𝐂𝐧 = 𝐂𝐎 − 𝐃𝐧 = 𝐏𝟐𝟐𝟎, 𝟎𝟎𝟎 − 𝐏𝟏𝟎𝟎, 𝟎𝟎𝟎 = 𝐏𝟏𝟐𝟎, 𝟎𝟎𝟎

(b) Declining Balance Method 𝐂𝐋 = 𝐏𝟐𝟐, 𝟎𝟎𝟎

𝐧 𝟓
𝐂𝐋 𝐋 𝐏𝟐𝟐, 𝟎𝟎𝟎 𝟏𝟎
𝐂𝐧 = 𝐂𝟎 = 𝐏𝟐𝟐𝟎, 𝟎𝟎𝟎 = 𝐏𝟔𝟗, 𝟓𝟕𝟎. 𝟏𝟎𝟖
𝐂𝟎 𝐏𝟐𝟐𝟎, 𝟎𝟎𝟎
(c) Double-Declining Balance Method 𝐂𝐋 = 𝐏𝟐𝟎, 𝟎𝟎𝟎
𝐧 𝟓
𝟐 𝟐
𝐂𝐧 = 𝐂𝟎 𝟏− = 𝐏𝟐𝟐𝟎, 𝟎𝟎𝟎 𝟏 − = 𝐏𝟕𝟐, 𝟎𝟖𝟗. 𝟔
𝐋 𝟏𝟎
THE SUM-OF-THE-YEARS’-DIGIT
METHOD
The Sum-of-the-Years’-Digit (SYD) Method
Let:
𝐧

𝐧 𝐨 𝐋

Example: For a property whose life is 5 years

Year Year in Depreciation Factor Depreciation during the year
Reverse
Order
1 5 5/15 (5/15)(𝐂𝐨 − 𝐂𝐋 )

2 4 4/15 (4/15)(𝐂𝐨 − 𝐂𝐋 )
𝐋(𝐋 + 𝟏) 3 3 3/15 (3/15)(𝐂𝐨 − 𝐂𝐋 )
𝐒𝐮𝐦 𝐨𝐟 𝐲𝐞𝐚𝐫𝐬 =
𝟐 4 2 2/15 (2/15)(𝐂𝐨 − 𝐂𝐋 )

5 1 1/15 (1/15)(𝐂𝐨 − 𝐂𝐋 )

Σ of digits = 15
Example Problem:
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.

Solution:
𝐂𝟎 − 𝐂𝐋 = 𝐏𝟏𝟐, 𝟎𝟎𝟎 − 𝐏𝟏, 𝟎𝟎𝟎 = 𝐏𝟏𝟏, 𝟎𝟎𝟎

Year Year in Depreciation during the year

Reverse Book Value at end of year
Order
1 5 (5/15) 𝐏𝟏𝟏, 𝟎𝟎𝟎 = 𝐏𝟑, 𝟔𝟔𝟔. 𝟔𝟔𝟕 𝐏𝟏𝟐, 𝟎𝟎𝟎 − 𝐏𝟑, 𝟔𝟔𝟔. 𝟔𝟔𝟕 = 𝐏𝟖, 𝟑𝟑𝟑. 𝟑𝟑𝟑

2 4 (4/15) 𝐏𝟏𝟏, 𝟎𝟎𝟎 = 𝐏𝟐, 𝟗𝟑𝟑. 𝟑𝟑𝟑 𝐏𝟖, 𝟑𝟑𝟑. 𝟑𝟑𝟑 − 𝐏𝟐, 𝟗𝟑𝟑. 𝟑𝟑 = 𝐏𝟓, 𝟒𝟎𝟎. 𝟎𝟎

3 3 (3/15) 𝐏𝟏𝟏, 𝟎𝟎𝟎 = 𝐏𝟐, 𝟐𝟎𝟎 𝐏𝟓, 𝟒𝟎𝟎. 𝟎𝟎 − 𝐏𝟐, 𝟐𝟎𝟎 = 𝐏𝟑, 𝟐𝟎𝟎. 𝟎𝟎

4 2 (2/15) 𝐏𝟏𝟏, 𝟎𝟎𝟎 = 𝐏𝟏, 𝟒𝟔𝟔. 𝟔𝟔𝟕 𝐏𝟑, 𝟐𝟎𝟎. 𝟎𝟎 − 𝐏𝟏, 𝟒𝟔𝟔. 𝟔𝟔𝟕 = 𝐏𝟏, 𝟕𝟑𝟑. 𝟑𝟑𝟑

5 1 (1/15) 𝐏𝟏𝟏, 𝟎𝟎𝟎 = 𝐏𝟕𝟑𝟑. 𝟑𝟑𝟑 𝐏𝟏, 𝟕𝟑𝟑. 𝟑𝟑𝟑 − 𝐏𝟕𝟑𝟑. 𝟑𝟑𝟑 = 𝐏𝟏, 𝟎𝟎𝟎. 𝟎𝟎

Σ of digits = 15

𝐋(𝐋 + 𝟏)
𝐒𝐮𝐦 𝐨𝐟 𝐲𝐞𝐚𝐫𝐬 =
𝟐
Example Problem:
A consortium of international telecommunication companies contracted for the purchase and installation of
a fiber optic cable linking two major cities at a total cost of US$960 million. This amount includes freight and
installation charges estimated at 10% of the above contract price. If the cable shall be depreciated over a
period of 15 years with zero salvage value:
(A) Given the sinking fund deposit factor of 0.0430 at 6% interest where n = 15, what is the annual
depreciation charge?
(B) What is the depreciation charge during the 8th year using the sum-of-the-years-digits method?

Solution: 𝐂𝟎 = $𝟗𝟔𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝐂𝐋 = 𝟎 𝐋 = 𝟏𝟓

(A) Sinking Fund

𝐂𝐎 − 𝐂𝐋 $𝟗𝟔𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎 − 𝟎
𝐝= = = $𝟒𝟏, 𝟐𝟒𝟒, 𝟐𝟓𝟑. 𝟒𝟎
(𝐅/𝐀, 𝐢%, 𝐋) 𝟏 + 𝟎. 𝟎𝟔 𝟏𝟓 − 𝟏
𝟎. 𝟎𝟔

or
𝐝 = 𝐂𝐎 − 𝐂𝐋 (𝐀/𝐅, 𝟔%, 𝟏𝟓) = $𝟗𝟔𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎(𝟎. 𝟎𝟒𝟑𝟎) = $𝟒𝟏, 𝟐𝟖𝟎, 𝟎𝟎𝟎. 𝟎𝟎
Continuation:
Solution: 𝐂𝟎 = $𝟗𝟔𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝐂𝐋 = 𝟎 𝐋 = 𝟏𝟓
𝐋(𝐋 + 𝟏) 𝟏𝟓(𝟏𝟓 + 𝟏)
(B) Sum of Digits = = = 𝟏𝟐𝟎
𝟐 𝟐

𝐑𝐞𝐯𝐞𝐫𝐬𝐞 𝐝𝐢𝐠𝐢𝐭 𝐜𝐨𝐫𝐫𝐞𝐬𝐩𝐨𝐧𝐝𝐢𝐧𝐠 𝐭𝐨 𝐭𝐡𝐞 𝟖𝐭𝐡 𝐲𝐞𝐚𝐫 𝐨𝐟 𝐥𝐢𝐟𝐞 = 𝟖

𝟖
𝐝𝐧 = ($𝟗𝟔𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎) = $𝟔𝟒, 𝟎𝟎𝟎, 𝟎𝟎𝟎)
𝟏𝟐𝟎
THE SERVICE OUTPUT METHOD
The Service-Output Method
This method assumes that the total depreciation that has taken place is
directly proportional to the quantity of output of the property up to that time.
This method has the advantage of making the unit cost of depreciation
constant and giving low depreciation expense during periods of low production.
Let:

𝟎 𝐋

𝐂𝟎 𝐂𝐋
𝐧 𝐓 𝐧
Example Problem:
A Television Company purchased machinery for P100,000 on July 1, 1979. It is estimated that it
will have a useful life of 10 years; scrap value of P4,000, production of 400,000 units and working hours
of 120,000.
The company uses the machinery for 14,000 hours in 1979 and 18,000 hours in 1980. The
machinery produces 36,000 units in 1979 and 44,000 units in 1980. Compute the depreciation for 1980
using each method given below:
(1) Straight line (2) Working hours (3) Output method
Solution: 𝐂𝐎 − 𝐂𝐋 𝐏𝟏𝟎𝟎, 𝟎𝟎𝟎 − 𝐏𝟒, 𝟎𝟎𝟎
𝐂𝟎 = 𝐏𝟏𝟎𝟎, 𝟎𝟎𝟎 (𝟏) 𝐝𝟖𝟎 = = = 𝐏𝟗, 𝟔𝟎𝟎
𝐋 𝟏𝟎
𝐂𝐋 = 𝐏𝟒, 𝟎𝟎𝟎
𝐂𝐎 − 𝐂𝐋 𝐏𝟏𝟎𝟎, 𝟎𝟎𝟎 − 𝐏𝟒, 𝟎𝟎𝟎
𝐋 = 𝟏𝟎 𝐲𝐞𝐚𝐫𝐬 (𝟐) 𝐝𝟖𝟎 = 𝐇𝟖𝟎 = (𝟏𝟖, 𝟎𝟎𝟎) = 𝐏𝟏𝟒, 𝟒𝟎𝟎
𝐓 = 𝟒𝟎𝟎, 𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬 𝐇 𝟏𝟐𝟎, 𝟎𝟎𝟎
𝐇 = 𝟏𝟐𝟎, 𝟎𝟎𝟎 𝐡𝐨𝐮𝐫𝐬
𝐂𝐎 − 𝐂𝐋 𝐏𝟏𝟎𝟎, 𝟎𝟎𝟎 − 𝐏𝟒, 𝟎𝟎𝟎
(𝟑) 𝐝𝟖𝟎 = 𝐐𝟖𝟎 = (𝟒𝟒, 𝟎𝟎𝟎) = 𝐏𝟏𝟎, 𝟓𝟔𝟎
𝐓 𝟒𝟎𝟎, 𝟎𝟎𝟎