Lecture 12
Lecture 12
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- Time-related physical loss: Some things deteriorate over time - Functional loss: Losses may occur without physical changes.
whether or not they are being used. Things may go out of style (fashion), become technologically
This could be due to environmental factors affecting them or obsolete, or may be affected by legislative changes (pollution
other physical factors. control devices).
For example, an unused tool may rust, and thus lose value over This type of loss is usually expressed simply in terms of the
time. particular unsatisfied function.
This type of loss is expressed in units of time
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Value of an Asset
- Book Value: The depreciated value of an asset for accounting
Depreciation models can be used to estimate the loss in value of an
purposes.
asset, as well as the remaining value of that asset at any point in
time. This remaining value can have several names. Book value can be more or less than market value.
The depreciation model used to arrive at a book value may be
- Market Value: The actual value an asset can be sold for in an open controlled by regulations, such as tax rules, or may be governed
market. by a choice based on the ease of calculation of one method over
Unless the asset is actually sold, market value can only be estimated. another.
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Why Bother with Depreciation?
- Salvage value: can either be the actual value of an asset when it To assist in planning: e.g. deciding which equipment to
is sold at the end of its useful life (when it is sold), or an estimate refurbish or replace.
of the salvage value calculated using a depreciation model.
Tax calculation: since the treatment of the depreciation of
assets directly affects expenses and it also affects profit,
hence taxes. The government provides depreciation rules.
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Engineering Economy 85-313-(01 & 02) Engineering Economy 85-313-(01 & 02)
Depreciation Methods
- Double-declining balance
- Straight Line
Depreciation rate is calculated as 2/N with a service life
Book value diminishes by an equal amount each year of N years
- Sum-of-the-year’s-digits - Units-of-production:
The depreciation rate is calculated as the ratio of Depreciation rate is determined per unit of production by
remaining years of life to the sum of the digits of the distributing initial cost over the estimated lifetime of the
remaining life production capacity
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Straight-Line Depreciation
Straight-Line Depreciation
Assumes the rate of loss in value of an asset is constant over
the useful life
P
Dsl(n)= (P - S)/N
Book Value
Dsl(n) = depreciation amount for period n
P = purchase price
S = salvage value S
N = useful life, in periods
BVsl(n) = P - n[(P - S) / N ] Time
0 N
BVsl(n) = book value at the end of period n
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Declining-balance depreciation
BVdb(n) = P (1-d)n
P
Value
BVdb(n) = S = P (1-d)n
S S
(1 − d ) = n
P
Time
S N
d = 1− n
P
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