# econ-lec2 - BASIC ECONOMIC TERMS Depreciation Re duction in...

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BASIC ECONOMIC TERMS Depreciation Reduction in value due to any causes. Example : Pump Cost : C V = \$12,000 Scrap value : V S = \$2,000 Depreciation : C V - V S = \$10,000 For engineers, depreciation is considered as a cost for using the equipment. ChE 4253 - Design I

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DEPRECIATION Types Of Depreciation Physical : Wear and Tear, corrosion, accidents, age deterioration. Functional: All other causes. Obsolescence : Due to technological advances. Depletion : Loss due to materials consumed. Applicable to Natural Resources (timber, mineral, oil deposits) IRS: “A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business including a reasonable allowance for obsolescence” ChE 4253 - Design I
DEPRECIATION Methods To Calculate Depreciation 1. Straight Line Depreciation : Value decreases linearly in time. D = (V- V S )/n D: Depreciation (\$/year) V : Original value V S : Salvage value. n : Service life Book Value : V a =V-a D a : number of years of use. ChE 4253 - Design I

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Methods To Calculate Depreciation 2. Multiple Straight Line Depreciation: Re-estimates the service life and salvage value at the end of every accounting period. 3. Declining balance or Fixed % Method: Depreciation (D) is a fixed % of the property value at the beginning of the year. Let f be the fixed % factor. End of first year : D = V f V a = V-V f = V(1-f), a =1 End of 2nd year : D = V(1-f) f V a = V(1-f) 2 , a =2 ChE 4253 - Design I
Methods To Calculate Depreciation 3. Declining balance or Fixed % Method: End of nth year : D= V(1-f) n-1 f V a = V(1-f) n =V S ==> f = 1 - (Matheson Formula) Emphasis on salvage value. Not used. What if V S =0 ? 4. Sum of the years method: Depreciation factor is given by the number of years of service left divided by the sum of the years of service. At year ‘a ’: n S V V / 1 ) 1 ( ) 1 ( 2 1 1 + + - = + - = = n n a n i a n f n i

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Methods To Calculate Depreciation Example (Sum of the years method) V= \$ 20,000, V S =\$ 2,000.; n=5 Year f a D a =(V-V S )f a (in \$) V a (in \$) 1 5/15 18000*5/15=6000 20000-6000=14000 2 4/15 18000*4/15=4800 14000-4800= 9200 3 3/15 3600 5600 4 2/15 2400 3200 5 1/15 1200 V S = 2000
Methods To Calculate Depreciation 5. Sinking fund method: Depreciation allowance is considered as a payment of an annuity used to recover the capital at the end of the period. Payments: R= (V-V S ) (see annuities) Total Depreciation after a years: D 1 + ….+ D a = V-V a Amount accumulated = Thus V a = V-(V-V S ) 1 ) 1 ( - + n i i ( 29 i i R i R a a k k 1 ) 1 ( 1 1 1 - + = + = - 1 ) 1 ( 1 ) 1 ( - + - + n a i i ChE 4253 - Design I

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Methods To Calculate Depreciation 6. Double Declining Method: Tax laws allow for depreciation up to twice the value calculated from the straight line method assuming zero scrap/salvage value. f=2/n
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## This note was uploaded on 09/07/2009 for the course CBME Kinetics & taught by Professor Lobban during the Spring '09 term at The University of Oklahoma.

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econ-lec2 - BASIC ECONOMIC TERMS Depreciation Re duction in...

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