Dr.
G Srinivas
Assistant Professor
Department of
Chemical Engineering
B V Raju Institute Of Technology
Narsapur
Course Name
Chemical Engineering Plant Design and Economics
Topic Name
Depreciation
Depreciation
Definition:
The physical assets decrease in value with age.
The decrease in value may be due to
Physical deterioration
Technological advances
Economic changes
Retirement of the property
The reduction in value due to any of these causes is a measure of the depreciation.
Depreciation
Types of Depreciation:
Physical depreciation
Functional depreciation
Physical depreciation:
Decrease in value due to changes in the physical aspects of the property
The elements are all causes of physical depreciation
Wear and tear ; Corrosion ; Accidents ; Deterioration due to age
One common type of functional depreciation is outdated
Depletion
Capacity loss due to materials actually consumed is measured as depletion.
Service Life
The period during which the use of a property is economically feasible is known as the
service life of the property.
Depreciation
Salvage value
Salvage value is the net amount of money obtainable from the sale of used property
Present value
The present value of an asset may be defined as the value of the asset in its condition at the time of
valuation.
Book Value
The difference between the original cost of a property, and all the depreciation charges made to date is
defined as the book value
Market Value
The price which could be obtained for an asset if it were placed on sale in the
open market is designated as the market value.
Replacement Value
The cost necessary to replace an existing property at any given time with one
at least equally capable of rendering the same service is known as the replacement value
Depreciation
Depreciation accounting methods may be divided into two classes:
(1) Arbitrary methods giving no consideration to interest costs.
(2) Methods taking into account interest on the investment.
Arbitrary methods:
1. Straight-line method
2. Declining-balance method
3. Double declining balance method
4. Sum-of-the-years-digits methods
Methods taking into account interest on the investment:
5. Sinking-fund and the
6. Present-worth method.
Depreciation
Straight-line method:
It is assumed that the value of the property decreases linearly with time.
Equal amounts are charged for depreciation each year throughout the entire service life of the property.
V Vs
d d = Depreciation cost ; V = Original value of the equipment ;
n Vs = Salvage value of the equipment ;
n = Service life of the property ;
Va V a d Va = Value of the asset in the ath year;
Q. a piece of equipment costing $22,000 when new.
The service life is estimated to be 5 years and the scrap value $2000.
Calculate book value for all years.
Sol: d = (22000 – 2000) / 5 = 4000 $
V1 =
V2 =
V3
V4
V5 =
Depreciation
Declining-balance method:
The fixed-percentage (or declining-balance) factor remains constant throughout the entire service life of the
property, while the annual cost for depreciation is different each year.
1
Vs n
f 1
V
Va V 1 f
a
Q. a piece of equipment costing $22,000 when new.
The service life is estimated to be 5 years and the scrap value $2000.
Calculate book value for all years.
Sol: f = 1 – (2000/22000)(1/5) = 0.62
V1 = 22000 x 0.621 = 13640
V2 = 22000 x 0.622 = 8456.8
V3 = 22000 x 0.623 = 5243.2
V4 = 22000 x 0.624 = 3250.8
V5 = 22000 x 0.625 = 2015.5
Depreciation
Double declining balance method :
The double-declining balance (DDB) method is a type of declining balance method that instead uses double
the normal depreciation rate.
A piece of equipment costing $22,000 when new. The service life is estimated to be 5 years and the scrap
value $2000. Calculate book value for all years.
Sol:
The straight-line depreciation rate is 1/5=0.20.
The double declining balance rate is twice the straight-line rate, so:Depreciation Rate=2×0.20=0.40
Year 1:
Depreciation = 0.40 × $22,000 = $8,800
Book Value = $22,000 - $8,800 = $13,200
Year 2:
Depreciation = 0.40 × $13,200 = $5,280
Book Value = $13,200 - $5,280 = $7,920
Depreciation
Sum-of-the-years digits method :
The sum-of-the-years digits method is an arbitrary process for determining depreciation which gives results
similar to those obtained by the declining-balance method.
Larger costs for depreciation are allotted during the early-life years than during the later years.
Q. a piece of equipment costing $22,000 when new. The service life is estimated to be 5 years and the scrap
value $2000. Calculate book value for all years.
Sol: Sum of the years = 1+2+3+4+5 = 15 ; Depreciable cost = 22000 – 2000 = 20000
Deprecation cost for 1st year = (5 / 15) x 20000 = 6666.67 ;
Book value Va = 22000 – 6666.7 = 15333.3
Deprecation cost for 2nd year = (4 / 15) x 20000 = 5333.3 ;
Book value Va = 15333.3 – 5333.3 = 10000
Deprecation cost for 3rd year = (3 / 15) x 20000 = 4000 ;
Book value Va = 10000 – 4000 = 6000
Deprecation cost for 4th year = (2 / 15) x 20000 = 2666.7 ;
Book value Va = 6000 – 2666.7 = 3333.3
Deprecation cost for 5th year = (1 / 15) x 20000 = 1333.3 ;
Book value Va = 3333.3 – 1333.3 = 2000
Depreciation
Thank you
