PROBLEM SOLVING FOR ENGINEERING ECONOMY DEPRECIATION

DEPRECIATION – the decrease in the value of property such as machinery, cars, equipment’s, buildings or other structures due to
passage of time.

METHODS OF DETERMINING DECPRECIATION COST

1. Straight Line Method

F . C .−S . V .
Annual Depreciation=[ ]
n
F . C .−S . V .
Total Depreciation after x years=[ ]x
n
Book Value=F .C .−Total Depreciation

Problem Solving:
a. A machine has an initial cost of P50000 and a salvage value of P10000 after 10 years. What is the book value after five
years using straight line depreciation?
b. The cost of the equipment is P500000 and the cost of installation is P30000. If the salvage value is 10% of the cost of
equipment at the end of 5 years, determine the book value at the end of the fourth year. Use straight line method.
c. An engineer bout an equipment for P500000. He spent ad additional cost of P30000 for installation and other expenses.
The salvage value is 10% of the final cost. If the book value at the end of 5 years will be P291500 using straight line
method of depreciation, compute the useful life of the equipment in years.

2. Sinking Fund Method

( F .C .−S .V . ) i
A nnual Depreciation=[ ]
(1+i)n−1
(1+ i) x −1
Total Depreciation after x years= Annual Depreciation[ ]
i
Book Value=F .C .−Total Depreciation
a. A unit of welding machine cost P45000 with an estimated life of 5 years. Its salvage value is P2500, find its depreciation
rate of sinking fund method. Assuming that will deposit the money to a bank giving 8.5%. Solve the depreciation.
b. A P110000 chemical plant had an estimated life of 6 years and a projected scrap value of P10000. After 3 years of
operation an expansion made it a total loss. How much money would have to be raised to put up a new plant costing
P150000, if a depreciation reserved have been maintained during its 3 years of operation by sinking fund method?
c. A dump truck was bought for P30000 six years ago. It will have a salvage value of P3000 four years from now. It is sold
now for P8000. What is its sunk cost if the depreciation method used is SFM at 6%?

3. Declining Balance Method (Matheson’s Formula/Constant Ratio Method)

S.V .
k =1−
√n

F .C .
, k – Depreciation Rate

Book Value=F .C .¿
Depreciation at mth year =(F . C .) ¿
a. A machine costing P720000 is estimated to have a life of 10 years. If the annual rate of depreciation is 25%, determine
the total depreciation using a constant percentage of the declining balance method.
b. A machine cost P7350 has a life of 8 years and has a salvage value of P350 at the end of 8 years. Determine its book
value at the end of 4 years using constant percentage of declining value.
c. 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 is has a book value of P58914 at the end of the 6th 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.

4. Double Declining Balance Method

2
k=
3
Book Value=( F . C .)¿
Depreciation=( F .C .) ¿
 a. An earth moving equipment that cost P90000 will have an estimated salvage value of P18000 at the end of 8 years.
Using double declining balance method, compute the book value and total depreciation at the end of 5th year.
b. Erectors Co. owns earth moving equipment that cost P90000. After 8 years it will have estimated salvage value of
P18000. Compute the depreciation charge for double declining balance method for first two years and the book value at
the end of 5 years.
c. An equipment costs P500000 and has a salvage value of P25000 after its 25 years of useful life. Using double declining
balance method, what will be the book value of the equipment at the end of 8 years?

5. Sum of the Years Digit Method (SYDM)

n
∑ of years digit = 2 (1+ n)
For Example , n=8
8
∑ of years digit = 2 ( 1+8 )
∑ of years digit =36
¿ ∑ of years digit =1+ 2+ 3+4 +5+6+7 +8=36

Yea Depreciation
r
1 (F.C. – S.V.)
8
36
2 (F.C. – S.V.)
7
36
3 (F.C. – S.V.)
6
36
4 (F.C. – S.V.)
5
36
5 (F.C. – S.V.)
4
36
6 (F.C. – S.V.)
3
36
7 (F.C. – S.V.)
2
36
8 (F.C. – S.V.)
1
36

Book Value=( F .C . )−Total Depreciation

Book Value after 4 years
8+7+ 6+5
Book Value=( F .C . )−(F .C .−S .V .)
36
a. The original cost of a certain is P150000 has an economic life of 8 years with a salvage value of P9000 at that time. If the
depreciation of the first year is equal to P44475, what method is used in the calculation of depreciation?
b. An equipment costs P8000 has an economic life of 8 years and a salvage value of P400 at the end of 8 years. The first
year depreciation amounts to P1688.89. What method is used in the depreciation?
 c. The corporation purchased a machine for P1million. Freight and installation charges amounted to 3% of the purchase
price. If the machine shall be depreciated over a period of 8 years with a salvage value of 12%. Determine the
depreciation charged during the 5th year using the SYDM.
d. 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 is the
SYDM.

6. Service Output Method

F . C .−S . V .
Depreciation per unit=
Total Units of Output duringlife of property
a. A certain machine cost P40000 and has a life of 4 years and a salvage value of P5000. The production output of this
machine in units per year for first year, 1800 units, second year 2200 units, third year 3000 units, fourth year 4000 units.
If the units produced are of uniform quality, what are the annual depreciation charges?

7. Working Hours or Machine

F . C .−S .V .
Depreciation per hour=
T otal Number of Hours
a. A certain equipment which cost P500000 when brand new has a salvage value of “x” pesos and is expected to last for
23000hrs in a period of 5 years. In the first year of service it was used for 7000 hours. If the book value of the equipment
is P360000 at the end of the first year, what is the value of “x”?
b. A machine was purchased at an original cost of P400000 with a salvage value of P20000. Life of the machine is
expected to last for 6 years. It was used for 4000hrs in the first year and 6000 hours on the second year. Compute the
book value at the end of the second year if the machine is expected to last for 38000 hrs in a period of 6 years.