CE 213 – ENGINEERING

ECONOMICS
 III. DEPRECIATION

The decrease in the value of the property such as machinery, car equipment, building, or other
structures, is due to the passage of time.
• Definition of terms:
• Value – present worth of all future profits that are to be received through ownership of a particular
property.
• Market Value – (of a property) is the amount which a willing buyer will pay to a willing seller for
the property where each has an equal advantage and is under no compulsion to buy or sell.
• Utility or Use Value – (of a property) is what the property is worth to the owner as an operating
unit.
• Book Value – (sometimes called depreciated book value) worth of a property.
• Salvage Value or resale – a price that can be obtained from the sale of the property after it has been
used.
• Scrap Value – is the amount the property would sell for if disposed off as junk
 PURPOSES OF
DEPRECIATION
• To provide for the recovery of capital that has been invested in physical property.
• To enable the cost of depreciation to be charged to the cost of producing products or services that result
from the use of the property.
Types of Depreciation
• Normal depreciation
• Physical – due to the lessening of the physical ability of a property to produce results.
• Functional – due to lessening in the demand for the function which the property was designed to render
• Depreciation due to changes in price levels – is almost impossible to predict.
• Depletion – refers to the decrease in the value of a property due to the gradual extraction of its contents.
• Physical life (of a property) is the length of time during which it is capable of performing the function
for which it was designed and manufactured.
• Economic Life is the length of time during which the property may be operated at a profit
 DEPRECIATION METHODS

1. Straight Line Method – assumes that the loss in value s directly proportional to the age of the
property.

• Annual depreciation =
• Total depreciation after “x” years

• Book Value
• Where in FC is the first cost
• n is the life in n years
 SAMPLE PROBLEMS
1. A machine has an initial cost of P50,000.00 and a salvage value of P10,000.00 after 10 years. What is the book value after five
years using straight-line depreciation?
2. A machine has an initial cost of P50,000.00 and a salvage value of P10,000.00 after 10 years. What is the straight-line method
depreciation rate as a percentage of the initial cost?
3. Equipment costs P10,000 with a salvage value of P500 at the end of 10 years. Calculate the annual depreciation by the Straight
Line Method.
4. A television company purchased machinery for P100,000.00 on July 1, 2020. It is estimated that it will have a useful life of 10
years, a 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 2020, and 18,000 hours in 2021. The machinery produces 36,000 units in 2020 and 44,000 units in 2021.
compute the depreciation for 2021 using the straight-line method.
5. An engineering firm purchased 12 years ago a heavy planner for P50,000.00. The life of the planner was 20 years, a straight line
depreciation reserve has been provided on that basis. Now that the firm wishes to replace the old planner possessing several
advantages. It can sell the old planner for P10,000.00. The new machine will cost P70,000.00. How much new capital will be
required to make the purchase?
6. An engineer bought equipment for P500,000. He spent an additional amount of P30000 for installation and other expenses. The
salvage value is 10% of the first cost. If the book value at the end of 5 yrs. will be P291,500 using the straight-line method of
depreciation, compute the useful life of the equipment in years.
 ASSIGNMENT

1. An asset is purchased for P500,000.00. The salvage value in 25 years is P100,000.00. What is the
depreciation in the first three years using the straight-line method?
2. A machine costs P8000 and has an estimated life of 10 years with a salvage value of P500. What
is its book value after 8 years using the straight-line method?
3. An asset is purchased for P9,000.00. Its estimated economic life is 10 years after which it will be
sold for P1,000.00. Find the depreciation in the first three years using the Straight Line Method.
4. A unit of welding machine costs P45,000 with an estimated life of 5 years. Its salvage value is
P2,500 find its depreciation rate of the straight-line method. Assuming that will deposit the
money to a bank giving 8.5%. Solve for the depreciation.
5. A radio service panel truck initially cost P56,000.00. Its resale value at the end of the 5 th year of
the useful life is estimated at P15,000.00 Determine the annual depreciation cost by means of the
straight-line method.
 DEPRECIATION METHODS

2. Sinking Fund Method – assumes that a sinking fund will accumulate for
replacement.
• Annual depreciation
• Total depreciation after “n” years:
• Dep
• Book value
 SAMPLE PROBLEMS

1. A unit of welding machine costs P45,000 with an estimated life of 5 years. Its salvage value is P2,500 find its
depreciation rate of the sinking fund method. Assuming that will deposit the money to a bank giving 8.5%.
Solve for the depreciation.
2. A P110,000 chemical plant had an estimated life of 6 years and a projected scrap value of P10,000. After 3
years of operation, an explosion made it a total loss. How much money would have to be raised to put up a
new plant costing P150,000, if a depreciation reserved has been maintained during its 3 years of operation by
the sinking fund method @ 6 % interest.
3. A broadcasting corporation purchased equipment for P53,000.00 and paid P1,500 for freight and delivery
charges to the job site. The equipment has a normal life of 10 years with a trade-in value of P5000.00 against
the purchase of new equipment at the end of the life. Determine the annual depreciation cost by the sinking
fund method @ 7% interest.
4. Certain office equipment has a first cost of P20,000 and has a salvage value of P1000 at the end of 10 years.
Determine the depreciation at the end of the 6th year using the sinking fund method at 3% interest.
 ASSIGNMENT
1. Equipment costs P10,000 with a salvage value of P500 at the end of 10 years. Calculate the annual
depreciation by sinking fund method at 40% interest
2. A piece of earth-moving machine equipment was purchased at a cash price of P25,000. The life of this
equipment was estimated at 6 years with no salvage value. However, at the end of 4 years, the machine
had become so inefficient, because of waring of parts, this was replaced. Depreciation was allowed on
the company books by the sinking fund method with a 4% interest. Determine the annual depreciation
3. A piece of earth-moving machine equipment was purchased at a cash price of P25,000. The life of this
equipment was estimated at 6 years with no salvage value. However, at the end of 4 years, the machine
had become so inefficient, because of waring of parts, this was replaced. Depreciation was allowed on
the company books by the sinking fund method with a 4% interest. Balance in the depreciation fund at
the end of 4 years.
4. A plant erected to manufacture socks has a first cost of P10,000,000 with an estimated salvage value of
P100,000 at the end of 25 years. Find its appraised value to the nearest P100 by the sinking fund
method, assuming an interest rate of 6% at the end of 10 years.
 ASSIGNMENT

5. A factory is constructed at the first cost of P8,000,000 and with an estimated salvage value of
P200,000 at the end of 25 years. Find its appraisal value to the nearest P100 at the end of 10 years
by using the sinking fund method of depreciation, assuming interest at 5%.
6. A hydraulic machine cost P180000 and has a salvage of P15000 at the end of its useful life which is
12 years. If the depreciation in the first year is P9780.71, what method is used in computing the
depreciation? Assume money is worth 6% annually.
 DEPRECIATION METHODS

• 3. Declining Balance Method – sometimes called the constant percentage method

1. A machine costing P45,000 is estimated to have a salvage value of P4,350 when retired at the end of
6 years. The depreciation cost is computed using a constant percentage of the declining book value.
What is the annual rate of depreciation in %?
2. A radio service panel truck initially cost P56,000.00. Its resale value at the end of the 5 th 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.
3. A machine that costs P7,350 and has a salvage value of P350 at the end of 4 years using the constant
percentage of declining value.
4. A machine having a certain first cost has a life of 10 years and a salvage value of 6.633% of the first
cost at the end of 10 years. If it has a book value of P58,914 at the end of the 6 th year, how much is
the first cost of the machine if the constant percentage of declining value is used in the computation
for its depreciation?
 ASSIGNMENT

1. Certain office equipment has a first cost of P20,000 and a salvage value of P1000 at the end of 10
years. Determine its book value at the end of 6 years using the declining balance method.
2. A cost of a certain asset is P3000, its life is 6 years and scrap value is P500. Find the annual rate of
depreciation under a constant percentage method and construct a depreciation table.
3. A machine costing P720,000 is estimated to have a book value of P40,545.73 when retired at the end
of 10 years. The depreciation cost is computed using a constant percentage of the declining book
value. What is the annual rate of depreciation in %
4. A product has a current selling price of P325.00. If its selling price is expected to decline at the rate of
10% per annum because of obsolescence, what will be its selling price four years hence?
5. A machine costing P720,000 is estimated to have a life of 10 yrs. If the annual rate of depreciation is
25%, determine the total depreciation using a constant percentage of declining balance method.
 DEPRECIATION METHODS

4. Sum of Years Digit Method

Service Output Method

Working Hours or Machine Hour Method

1. The original cost of a certain machine is P150,000, which has an economic life of 8 years with a salvage
value of P9,000at that time. If the depreciation of the first year is equal to P44,475, what method is used in
the calculation of the depreciation?
2. An asset is purchased for P9,000.00. Its estimated life is P1,000.00. Find the book value during the third
year if the sum-of-the-year digit (SOYD) depreciation is used.
3. ABC Corporation makes its policy that for every new equipment purchased, the annual depreciation cost
should not exceed 20%of the first cost at any time without salvage value. Determine the length of service if
the depreciation used is the SYD Method.
4. An asset is purchased for 20,000.00 Its estimated life is 10 years after which it will be sold for P12,000.00.
Find the depreciation for the first year using the sum of the year’s digit method.
5. A telephone company purchased microwave radio equipment for P6M. Freight and installment charges
amounted to 3% of the purchased price. If the equipment shall be depreciated over a period of 8 years with
a salvage value of 5%. Determine the depreciation charge during the 5 th year using the sum of the year digit
method.
 ASSIGNMENT

1. An asset is purchased for P9,000.00. Its estimated life is 10 years after which it will be sold for P1,000.00.
Find the book value during the first year if the sum-of-the-year digit (SOYD) depreciation is used.
2. An asset is purchased for P120,000.00. Its estimated life is 10 years, after which it will be sold for
P12,000.00. Find the depreciation for the second year using the sum-of-the-years-digit method
3. Special tools for the manufacture of the finished product costs P20,000 and have salvage value of P2000
at the end of an estimated three year useful life. Compute the second year depreciation using sum of years
digit method.
4. A certain equipment costs P7,000 has an economic life of “n” years and a salvage value of P350 at the end
of “n” years. If the book value at the end of 4 years is equal to P2197.22, compute the economic life of the
equipment using the sum of the years digit method.
5. An equipment costs P7000, has a life of 8 years and a salvage value of P350 at the end of 8 years.
Determine the depreciation charge during the 4 th year using the sum of years digit method. Compute also
the total depreciation at the end of the 4 th year.