1. Indexes, I, provide a means for developing present and future cost and price estimates from historical data.
k = reference year for which cost or price is known.
n = year for which cost or price is to be estimated (n>k).
Cn = estimated cost or price of item in year n.
Ck = cost or price of item in reference year k.
Indexes can be created for a single item or for multiple items (eqs. 3-1, 3-2).

2. Pause and solve
In 2002 Acme Chemical purchased a large pump for $112,000. Acme keys their cost estimating for these pumps to the industrial pump index, with a baseline of 100 established in The index in 2002 was Acme is now (2010) considering construction of a new addition and must estimate the cost of the same type and size of pump. If the industrial pump index is currently 286, what is the estimated cost of the new pump?

3. Solution
Cost of the new pump (using eq. 3-1)

4. EXAMPLE 3-3 Indexing the Cost of a New Boiler

5. Weighted Index

6. EXAMPLE 3-4 Weighted Index for Gasoline Cost
continued on next slide

7. EXAMPLE 3-4 (continued) Weighted Index for Gasoline Cost

8. Straight line (SL): constant amount of depreciation each year over the depreciable life of the asset.
BVk = book value at end of k
SVN = salvage value
N = depreciable life
B = cost basis
dk = depreciaton in k

9. Pause and solve
Acme purchased a coordinate measurement machine (CMM). The cost basis is $120,000 and it has a seven year depreciable life. Acme estimates a salvage value of $22,000 at the end of seven years. Determine the annual depreciation amounts using SL depreciation. Tabulate the annual depreciation amounts and book value of the CMM at the end of each year.

10. Solution B = $120,000 SV = $22,000 N = 7 years Year Depreciation
Ending Book Value 1
$14,000
$106,000 2
$92,000 3
$78,000 4
$64,000 5
$50,000 6
$36,000 7
$22,000

11. EXAMPLE 7-1 SL Depreciation
continued on next slide

12. EXAMPLE 7-1 (continued) SL Depreciation