15/07/2020

CE40-2: ENGINEERING ECONOMICS

CHAGAYATIN

DEPRECIATION METHODS
3. DECLINING BALANCE METHOD

CE40-2: percentage method or Matheson Formula assumes that the annual

cost of depreciation is a fixed percentage of the salvage value at

ENGINEERING
the beginning of the year.
The ratio of the depreciation in any year to the book value at the
beginning of that year is constant through out the life of the
ECONOMICS property and is designated by K, the rate of depreciation.

n
K=1− Cn ΤCo
COURSE OUTCOME 3 n
Deal with risk and uncertainty in K=1− CL ΤCo
project outcomes by applying *not applicable if salvage value is zero because K =1
economic decision making
concepts CO3-DEPRECIATION
Engr. Charity Hope Gayatin

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CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS
CHAGAYATIN CHAGAYATIN

DEPRECIATION METHODS DEPRECIATION METHODS

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DECLINING BALANCE METHOD DECLINING BALANCE METHOD PROBLEM
assumes that the funds will accumulate for replacement A certain type of machine loses 10% of its value each year. The
Cn = CO 1 − K n
CL = CO 1 − K L
dn = KCO 1 − K n−1
ur machine costs P20,000 originally. Make out a schedule showing the
yearly depreciation, the total depreciation and the book value at
the end of each year for 5years.
so
dn - depreciation charge during the nth year
L - useful life of the property in years
CO - original cost
se ia re

CL - value at the end of life, scrap value

Cn - book value at the end of n years
Dn - depreciation up to age n years
m
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CO3-DEPRECIATION CO3-DEPRECIATION
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CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS

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CHAGAYATIN CHAGAYATIN

DEPRECIATION METHODS DEPRECIATION METHODS

Th

DECLINING BALANCE METHOD PROBLEM 4. DOUBLE DECLINING BALANCE METHOD

H

A certain type of machine loses 10% of its value each year. The similar to the declining balance method except that the rate of
machine costs P20,000 originally. Make out a schedule showing the depreciation K = 2/L
yearly depreciation, the total depreciation and the book value at Cn = CO 1 − K n
the end of each year for 5years.
CL = CO 1 − K L
a

BVB- beginning book value dn = KCO 1 − K n−1

sh

d- yearly depreciation charge

dn - depreciation charge during the nth year
Dn- Total depreciation
n BVB d Dn BVE
BVE- end book value L - useful life of the property in years
1 20,000 2,000 2,000 18,000
10% =K CO - original cost
2 18,000 1,800 3,800 16,200
CL - value at the end of life, scrap value
3 16,200 1,620 5,420 14,580
4 14,580 1,458 6,878 13,122
Cn - book value at the end of n years
5 13,122 1,312.20 8,190.20 11,809.80 Dn - depreciation up to age n years

CO3-DEPRECIATION CO3-DEPRECIATION

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 15/07/2020

CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS

CHAGAYATIN CHAGAYATIN

DEPRECIATION METHODS DEPRECIATION METHODS

DOUBLE DECLINING BALANCE METHOD PROBLEM DOUBLE DECLINING BALANCE METHOD PROBLEM
Determine the rate of depreciation, the total depreciation up to 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 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 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 value of P2,000 at the end of 10 years by (a) the declining balance
method and (b) the double declining balance method. method and (b) the double declining balance method.
K is equal to 2/L.
K =1– n√ ( Cn / CO) Cn = CO ( 1 – K ) n
=1– L√ ( CL / CO) CL = CO ( 1 – K ) L
a) dn = KCO ( 1 – K ) n – 1
10 2,000
b)
K=1− 15,000
=0.1825=18.25% 2
K= = 0.20 = 20%
Dn = CO − Cn 10
Dn = CO − Cn
Cn = 15,000(1 − 0.1825)8 = P2,992.22
Cn = 15,000(1 − 0.20)8
Dn =P12,007.78
= P2,516.58
Dn =P12,483.42

CO3-DEPRECIATION CO3-DEPRECIATION

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CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS
CHAGAYATIN CHAGAYATIN

DEPRECIATION METHODS DEPRECIATION METHODS

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5. SUM OF THE YEARS DIGIT METHOD SUM OF THE YEARS DIGIT METHOD PROBLEM
assumes that the funds will accumulate for replacement A structure costs P120,000. It is estimated to have a life of 5years,
dn = Reverse DigitΤSum of Digit CO − CL
dn = Depreciation Factor CO − CL
ur with a salvage value at the end of its life of P1000. Determine the
book value at the end of each year of life. Use sum-of-the-years’-
digit method.
dn - depreciation charge during the nth year
so
L - useful life of the property in years
CO - original cost
CL - value at the end of life, scrap value
se ia re

Cn - book value at the end of n years

Dn - depreciation up to age n years
m
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CE40-2: ENGINEERING ECONOMICS CE40-2: ENGINEERING ECONOMICS

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CHAGAYATIN CHAGAYATIN

DEPRECIATION METHODS
Th

SUM OF THE YEARS DIGIT METHOD PROBLEM

H

A structure costs P120,000. It is estimated to have a life of 5years,

with a salvage value at the end of its life of P1000. Determine the
book value at the end of each year of life. Use sum-of-the-years’-
digit method.
a

dn= (RD/SD)*(CO–CL) n BVB d Dn BVE

sh

Dtotal= CO–CL 1 120,000 5/15 * 119,000 39,666.67 80,333.33

=120,000-1,000 2 80,333.33 4/15 * 119,000 71,400 48,600
=P119,000
3 48,600 3/15 * 119,000 95,200 24,800
RD- start with the 4 24,800 2/15 * 119,000 111,066.67 8,933.33
end year and end
with the starting year 5 1,000 1/15 * 119,000 119,000 1,000

CO3-DEPRECIATION COURSE OUTCOME 3

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