Engineering Economy IEN255 Chapter 7 - Depreciation  fig 7.1

Engineering Economy Depreciation  Economic Depreciation = Purchase Price - Market Value  Accounting  capitalized =accounting depreciation=asset depreciation  fraction of the cost is chargeable in each period

Engineering Economy Depreciable Property  It must be used in business or held for production of income  It must have a definite service life longer than 1 year  It must be something that wears out, decays, gets used up, becomes obsolete (ie, not land)

Engineering Economy Terms  Cost Basis - actual cost and other expenses  Salvage Value - estimated value at end of life  Depreciable Life - how many periods is it useful?  Two methods  tax - for IRS  book - for reports ä straight line ä accelerated ä unit of production

Engineering Economy Book Method  Straight line (7.1) D n = Depreciation charge during year n I = Cost of the Asset (including installation expenses) S = Salvage value at end of useful life N = Useful life Book value B n = I - (D 1 + D 2 + D 3 … + D n )

Engineering Economy Example 7.3

Engineering Economy Accelerated Methods (declining balance)  Fixed fraction   = (1/N)(multiplier)  for any year the depreciation is:  D n =  I(1-  ) n-1 (7.4)  the total depreciation to year n is:  = I[1-(1-  ) n ] (7.7)  the book value at n is  B n = I(1-  ) n (7.7)

Engineering Economy What about salvage value?  Case 1: B n > S  switch to SL from DB  Case 2: B n < S  stop when depreciation reaches salvage value

Engineering Economy Sum of Years Digits  SOYD = N(N+1)/2 (7.10)  example 7.7

Engineering Economy Units of Production  Unequal use (7.12) Example 7.8

Engineering Economy Tax Depreciation  MACRS (Modified Accelerated Cost Recovery System)  Salvage Value is always zero  table 7.2

Engineering Economy MACRS Depreciation Rates  Table 7.3

Engineering Economy Switching  Example 7.9

Engineering Economy Depletion  Figure 7.7

Engineering Economy Repairs or Improvements  Can we estimate useful life accurately?  Fig 7.8

Engineering Economy IEN255 Summer’99 Chapter 6 & 7 HW#3  Homework Assignment: Chapter 6 #’s 6.1; 6.5; 6.7a,c; 6.11; 6.20; 6.28 Chapter 7 7.3; 7.6; 7.15; 7.18; 7.26; 7.36 Chapter 8 (not due, but attempt the homework) 8.1; 8.5; 8.11; 8.16; 8.17; 8.23  Due together (Tues July 13)

Engineering Economy Sample solution from 6.7