BES 02 - Engineering

Economics

This is a property of
PRESIDENT RAMON MAGSAYSAY STATE UNIVERSITY
NOT FOR SALE
BES 02 – Engineering Economics
First Edition, 2021

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Learning Module Development Team

Assigned
Title Author
Chapter
Chapter 1: The Economic Environment
Chapter 2: Interest and Money-Time Relationship Dionisio M. Martin Jr.
Chapter 3: Depreciation
Chapter 4: Capital Financing
Chapter 5: Selections in Present Economy

Evaluators:

(First Name, Middle Initial, Last Name), Position

(First Name, Middle Initial, Last Name), Position
(First Name, Middle Initial, Last Name), Position
Course Overview
Introduction

Engineering Economics is a three-unit basic engineering science course, that is common to all
engineering disciplines. This course discusses the economics environment that affects the
money value in the daily operations in engineering fields.

This course explores the effects of inflation and deflation of money on the market where
engineering plays a part of this important factors in economics. It also involves the systematic
evaluation of the economic benefits of proposed solutions to engineering problems. The
engineering economics involves technical analyzing with emphasis on the economic aspects
and has the objective of assisting decisions.

Course General Objectives

At the end of the semester, 85% of the students have attained 90% level of understanding for
being aware in the engineering economics, locally and globally.

1. Understand the economics environment in engineering field perspective.

2. Solve problems involving interest and the time value of money.
3. Evaluate project alternatives by applying engineering economic principles and
methods and select the most economically efficient one.
4. Deal with risk and uncertainty in project outcomes by applying the basic economic
decision-making concept.
5. Perform mathematically solution to perform decision-making in a certain economic
condition.

Course Details:

• Course Code: BES 02

• Course Title: Engineering Economics
• No. of Units: 3-unit lecture
• Classification: Lecture-based
• Pre-requisite / Co-Requisite: 2nd Year Standing
• Semester and Academic Year: 1st Semester, AY 2021-2022
• Schedule: BSCpE 2A – Monday, Wednesday and Friday, 9:30AM-10:30 AM
• Name of Faculty: Dionisio M. Martin Jr.
• Contact Details
Email: dmmartinjr@yahoo.com
Mobile Number: 0939-906-0585
FB Account: Dionisio Martin Jr.
• Consultation
Day: TTH
Time: 8:00-9:30AM
Learning Management System

The University LMS will be used for asynchronous learning and assessment. The link and class
code for LMS will be provided at the start of class through the class’ official Facebook Group.

• Edmodo
• Google Classroom
• University LMS

Assessment with Rubrics

Students will be assessed in a regular basis thru quizzes, assignments, individual/group outputs
using synchronous and/or asynchronous modalities or submission of SLM exercises. Rubrics
are also provided for evaluation of individual/group outputs.

Major examinations will be given as scheduled. The scope and coverage of the examination
will be based on the lessons/topics as plotted in the course syllabus.
 0323

Module Overview
Introduction

This module aims to introduce economics to engineering students particularly the computer
engineering students as to their chosen field of specialization in engineering. It will let them to
meaning and usage of interest in engineering field. The money time value relationship for
certain applied condition and the depreciation effect to the organization where he/she belongs.
The capital financing suited to start new business or project related in some cases and situation
where the best selection is needed.

On the later part of this module, the application of different methods for different economic
study for engineering will be discussed. The comparing of solved alternatives and the
replacement studies in dealing engineering project study. The break-even analysis as well as
the benefit/cost analysis in establishing new concept and ideas in engineering application
related in computer field.

The students will learn how to make decision using a mathematical approach from solving
different case studies at the end of each lesson/chapter.

Table of Contents

Chapter 1: The Economic Environment

Chapter 2: Interest and Money-Time Relationship
Chapter 3: Depreciation
Chapter 4: Capital Financing
Chapter 5: Preparing for an Engineering Career
Engineering Economics

Chapter 3

Depreciation
Chapter 3

Depreciation
Introduction

On a project level, engineers must be able to assess how the practice of depreciating fixed
assets influences the investment value of a given project. To do this, the engineers need to
estimate the allocation of capital costs over the life of the project, which requires an
understanding of the conventions and techniques that accountants use to depreciate assets.

Specific Objectives

At the end of the lesson, the students should be able to:

- know the meaning and types of depreciation

- know the effect of depreciation on income calculations
- determine the difference between ordinary gains and capital gains
- solve and determine the appropriate rate to use in project analysis
- solve to find the relationship of net income and net cash flows

Duration

Chapter 3: Depreciation = 2 hours

(1.5-hours discussion;
0.5-hour assessment)

_____________________________________________

DEPRECIATION

Depreciation – is the decrease in the value of physical property with the passage of time.

Definition of Value
a. Value – is the present worth of all future profits that are to be received through
ownership of a particular property.
b. Market value – is the amount which a willing buyer will pay to a willing seller for the
property where each has equal advantage and is under no compulsion to buy or sell.
c. Utility or use value – is what the property is worth to the owner as an operating unit.
d. Fair value – is the value which is usually determined by a disinterested third party in
order to establish a price that is fair to both seller and buyer.
e. Book value – sometimes called depreciated book value, is the worth of a property as
shown on the accounting records of an enterprise.
f. Salvage value – or resale, is the price that can be obtained from the sale of the property
after it has been used.
g. Scrap value – is the amount the property would sell for if disposed of as junk.
Purpose of Depreciation
1. To provide for the recovery of capital which has been invested in physical property.
2. To enable the cost of depreciation to be charged to the cost of producing products or
services that results from the use of the property.

Types of Depreciation
1. Normal depreciation
a. Physical – is due to the lessening of the physical ability of a property to produce
results. Its common causes are wear and deterioration.
b. Functional – is due to the lessening in the demand for the function which the
property was designed to render. Its common causes are inadequacy, changes in
styles, population centers shift, saturation of markets or more efficient machines
are produced.
2. Depreciation due to changes in price levels
3. Depletion – refers to the decrease in the value of a property due to the gradual extraction
of its contents.

Physical life – is the length of time during which it is capable of performing the function for
which it was designed and manufactured.
Economic life – is the length of time during which the property may be operated at a profit.

Requirement of a Depreciation Method

1. It should be simple
2. It should recover capital
3. The book value will be reasonably close to the market value at any time.
4. The method should be accepted by the Bureau of Internal Revenue (BIR).

Depreciation Methods
The following symbols for the different depreciation methods:
𝐿 = useful life of the property in years
𝐶𝑂 = the original cost
𝐶𝐿 = the value at the end of the life, the scrap value (including gain or loss due to
removal)
𝑑 = the annual cost of depreciation
𝐶𝑛 = the book value at the end of n years
𝐷𝑛 = depreciation up to age n years

1. Straight Line Method – assumes that the loss in value is directly proportional to the age of
the property.
Formula:
𝐶𝑂 −𝐶𝐿
𝑑= , annual depreciation
𝐿
𝑛 (𝐶𝑂 −𝐶𝐿 )
𝐷𝑛 = , depreciation at n years
𝐿

𝐶𝑛 = 𝐶𝑂 − 𝐷𝑛 , Book value at n years

Sample Problem:

Problem 1.) An electronic balance costs ₱90,000 and has an estimated salvage value of ₱8,000
at the end of its 10-year life time. What would be the book value after three years, using
the straight-line method in solving for depreciation?
Find: book value after three years (𝐶𝑛 )
Solution:
𝐶𝑂 = 90,000 𝐶𝐿 = 8,000 𝐿 = 10 𝑛=3
𝐶𝑂 −𝐶𝐿
𝑑= 𝐿
90,000−8,000
= 10

= ₱𝟖, 𝟐𝟎𝟎

𝐷𝑛 = 𝑛𝑑
𝐷3 = 3(8,200)
= ₱𝟐𝟒, 𝟔𝟎𝟎

𝐶𝑛 = 𝐶𝑂 − 𝐷𝑛
𝐶3 = 90,000 − 24,600
= ₱𝟔𝟓, 𝟒𝟎𝟎

2. Sinking Fund Method – assumes that a sinking fund is established in which funds will
accumulate for replacement. The total depreciation that has taken place up to any given
time is assumed to be equal to the accumulated amount in the sinking fund at that time.
Formula:
𝐶𝑂 −𝐶𝐿
𝑑= 𝐹 ; 𝑑 = [(𝐶𝑜 − 𝐶𝐿)𝑖 ] / [(1 + 𝑖)𝐿 − 1]
,𝑖%,𝐿
𝐴

𝐹
𝐷𝑛 = 𝑑 (𝐴 , 𝑖%, 𝑛) , Dn = d[(1+i)n-1]/ i
𝐶𝑛 = 𝐶𝑂 − 𝐷𝑛

Sample Problem:

Problem 1.) A broadcasting corporation purchased an equipment for ₱53,000 and paid ₱1,500
for freight and delivery charges to the job site. The equipment has a normal life of 10 years
with a trade-in value of ₱5,000 against the purchase of a new equipment at the end of the
life.
(a) Determine the annual depreciation cost by the straight-line method.
(b) Determine the annual depreciation cost by the sinking fund method. Assume
interest at 6.5% compounded annually.
Find: annual depreciation cost (𝑑)
Solution:
𝐶𝑂 = 53,000 + 1,500
 = 54,500
𝐶𝐿 = 5,000
𝐶𝑂 −𝐶𝐿
(a) 𝑑 = 𝐿
54,500−5,000
= 10

= ₱𝟒, 𝟗𝟓𝟎
𝐶𝑂 −𝐶𝐿
(b) 𝑑 = 𝐹 ; 𝑑 = [(𝐶𝑜 − 𝐶𝐿)𝑖 ] / [(1 + 𝑖)𝐿 − 1]
,𝑖%,𝐿
𝐴
54,500−5,000
= 𝐹
,6.5%,10
𝐴
49,500
=
18.3846

= ₱𝟑, 𝟔𝟔𝟖. 𝟏𝟖

Problem 2.) A firm bought an equipment for ₱56,000. Other expenses including installation
amounted to ₱4,000. The equipment is expected to have a life of 16 years with a salvage
value of 10% of the original cost. Determine the book value at the end of 12 years by (a)
the straight-line method and (b) sinking fund method at 12% interest.
Find: book value (𝐶𝑛 )
Solution:
𝐶𝑂 = 56,000 + 4,000
= 60,000
𝐶𝐿 = 60,000(0.10)
= 6,000

𝐿 = 16 𝑛 = 12 𝑖 = 12%
𝐶𝑂 −𝐶𝐿
(a) 𝑑= 𝐿
60,000−6,000
=
16

= ₱𝟑, 𝟑𝟕𝟓

𝐷𝑛 = 𝑛𝑑
𝐷12 = 12(3,375)
= ₱𝟒𝟎, 𝟓𝟎𝟎

𝐶𝑛 = 𝐶𝑂 − 𝐷𝑛
𝐶12 = 60,000 − 40,500
= ₱𝟏𝟗, 𝟓𝟎𝟎
𝐶𝑂 −𝐶𝐿
(b) 𝑑= 𝐹
,𝑖%,𝐿
𝐴
 60,000−6,000
= 𝐹 ; 𝑑 = [(𝐶𝑜 − 𝐶𝐿)𝑖 ] / [(1 + 𝑖)𝐿 − 1]
,12%,16
𝐴
54,000
=
42.7533

= ₱𝟏, 𝟐𝟔𝟑. 𝟎𝟔

𝐹
𝐷𝑛 = 𝑑 (𝐴 , 𝑖%, 𝑛) ; Dn = d[(1+i)n-1]/ i
𝐹
𝐷12 = 1,263.06 (𝐴 , 12%, 12)
= 1,263 (24.1331)
= 𝟑𝟎, 𝟒𝟖𝟏. 𝟔𝟎

𝐶𝑛 = 𝐶𝑂 − 𝐷𝑛
𝐶12 = 𝐶𝑂 − 𝐷12
= 60,000 − 30,481.60
= ₱𝟐𝟗, 𝟓𝟏𝟖. 𝟒

3. Declining Balance Method – sometimes called the constant percentage method or the
Matheson Formula, is assumed that the annual cost of depreciation, is a fixed percentage
of the salvage value at the beginning of the year.
Book value at Depreciation
Year Book value at end of year
beginning of year during the year
1 𝐶𝑂 𝑑1 = 𝑘𝐶𝑂 𝐶1 = 𝐶𝑂 − 𝑑1 = 𝐶𝑂 (1 − 𝑘)
2 𝐶𝑂 (1 − 𝑘) 𝑑2 = 𝑘𝐶1 𝐶2 = 𝐶1 − 𝑑2 = 𝐶𝑂 (1 − 𝑘)2
3 𝐶𝑂 (1 − 𝑘)2 𝑑3 = 𝑘𝐶2 𝐶3 = 𝐶2 − 𝑑3 = 𝐶𝑂 (1 − 𝑘)3
… … … …
n 𝐶𝑂 (1 − 𝑘)𝑛−1 𝑑𝑛 = 𝑘𝐶𝑛−1 𝐶𝑛 = 𝐶𝑛−1 − 𝑑𝑛 = 𝐶𝑂 (1 − 𝑘)𝑛
… … … …
L 𝐶𝑂 − 𝑘)𝐿−1
(1 𝑑𝐿 = 𝑘𝐶𝐿−1 𝐶𝐿 = 𝐶𝐿−1 − 𝑑𝐿 = 𝐶𝑂 (1 − 𝑘)𝐿

Formula:
𝑛 𝐶 𝐿 𝐶
𝑘 = 1 − √ 𝑛 = 1 − √ 𝐿 ; CL = Co (1 – k)L (Annual rate of depreciation,k)
𝐶 𝐶 𝑂 𝑂

𝐷𝑛 = 𝐶𝑂 (1 − 𝑘 )𝑛−1 𝑘 -- Depreciation at the end of n years

𝑛
𝐶 𝐿
𝐶𝑛 = 𝐶𝑂 (1 − 𝑘 )𝑛 = 𝐶𝑂 [𝐶 𝐿 ] -- Book Value at n years
𝑂

𝐶𝐿 = 𝐶𝑂 (1 − 𝑘 )𝐿 -- Book Value at end of life

Sample Problem:

Problem 1.) A certain type of machine loses 10% of its value each year. The machine costs
₱2,000.00 originally. Make out a schedule showing the yearly depreciation, the total
depreciation and the book value at the end of each year for 5 years.
Find: depreciation and book value schedule
Solution:
Book value at Depreciation Total
Book value at
Year the beginning during the year depreciation at
the end of year
of year 10% the end of year
1 2,000.00 200.00 200.00 1,800.00
2 1,800,00 180.00 380.00 1,620.00
3 1,620.00 162.00 542.00 1,458.00
4 1,458.00 145.80 687.80 1,312,20
5 1,312.20 131.22 819.12 1,180.98

Problem 2. ) The first cost of a machine is Php 1,800,000 with a salvage value of Php 400,000
at the end of its life of five years. Determine the depreciation after three years using Constant-
Percentage Method.

Solve for (1 – k)
CL = Co (1 – k)L
400,000 = 1,800,000 (1 – k) 5
(1 – k) = 0.74 ; k = 1 – 0.74 = 0.26

𝐷𝑛 = 𝐶𝑂 (1 − 𝑘 )𝑛−1 𝑘 = 1,800,000(0.74)(3-1) (0.26)

Dn = 256,276.8

4. Double Declining Balance (DDB) Method – is very similar to the declining balance
2
method except that the rate of depreciation 𝑘 is replaced by 𝐿.
Formula:
2 𝑛−1 2
𝑑𝑛 = 𝐶𝑂 (1 − 𝐿) 𝐿
2 𝑛
𝐶𝑛 = 𝐶𝑂 (1 − 𝐿)
2 𝐿
𝐶𝐿 = 𝐶𝑂 (1 − 𝐿)
Sample Problem:

Problem 1.) 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 for an asset that costs ₱15,000 new and has
an estimated scrap value of ₱2,000 at the end of 10 years by (a) the declining balance
method and (b) the double declining balance method.
Find: rate of depreciation, the total depreciation and the book value
Solution:
𝐶𝑂 = 15,000 𝐶𝐿 = 2,000 𝐿 = 10 𝑛=8
𝐿 𝐶
(c) 𝑘 = 1 − √𝐶𝐿
𝑂

10 2,000
= 1− √
15,000

= 𝟎. 𝟏𝟖𝟐𝟓 or = 𝟏𝟖. 𝟐𝟓%

𝐶𝑛 = 𝐶𝑂 (1 − 𝑘 )𝑛
𝐶8 = 15,000(1 − 0.1825)8
= ₱𝟐, 𝟗𝟗𝟐

𝐷𝑛 = 𝐶𝑂 − 𝐶𝑛
𝐷8 = 15,000 − 2,992
= ₱𝟏𝟐, 𝟎𝟎𝟖
2
(d) 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐿
2
= 10

= 0.20 or = 𝟐𝟎%

2 𝑛
𝐶𝑛 = 𝐶𝑂 (1 − 𝐿)
2 8
𝐶8 = 15,000 (1 − 10)
= ₱𝟐, 𝟓𝟏𝟔. 𝟓𝟖

𝐷𝑛 = 𝐶𝑂 − 𝐶𝑛
𝐷8 = 15,000 − 2,516.58
= ₱𝟏𝟐, 𝟒𝟖𝟑.42

Problem 2.) A plant bought a calciner for ₱220,000 and used for 10 years, the life span of the
equipment. What is the book value of the calciner after 5 years of use? Assume a scrap
value of ₱20,000 for straight line method; ₱22,000 for textbook declining balance method
and ₱20,000 for a double declining balance method.
Find: the book value
Solution:
 𝐶𝑂 = 220,000 𝐶𝐿 = 20,000 𝐿 = 10 𝑛=5
(a) 𝐶𝐿 = 20,000
𝑛 (𝐶𝑂 −𝐶𝐿 )
𝐷𝑛 = 𝐿
5 (220,000−20,000)
𝐷5 =
10
= ₱𝟏𝟎𝟎, 𝟎𝟎𝟎

𝐶𝑛 = 𝐶𝑂 − 𝐷𝑛
𝐶5 = 220,000 − 100,000
= ₱𝟏𝟐𝟎, 𝟎𝟎𝟎

(b) 𝐶𝐿 = 22,000
𝑛
𝐶 𝐿
𝐶𝑛 = 𝐶𝑂 [ 𝐿 ]
𝐶𝑂
5
22,000 10
𝐶5 = 220,000 [220,000]

= ₱𝟔𝟗, 𝟓𝟕𝟎

(c) 𝐶𝐿 = 20,000
2 𝑛
𝐶𝑛 = 𝐶𝑂 (1 − 𝐿)
2 5
𝐶5 = 220,000 (1 − 10)
= ₱𝟕𝟐, 𝟎𝟗𝟎

5. Sum-of-Years’-Digits (SYD) Method – is a form of accelerated depreciation that is based

on the assumption that the productivity of the asset decreases with the passage of time.
Formula:
𝑑𝑛 = 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑐ℎ𝑎𝑟𝑔𝑒 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑛𝑡ℎ 𝑦𝑒𝑎𝑟
𝑑𝑛 = (𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑓𝑎𝑐𝑡𝑜𝑟)(𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛)
𝑟𝑒𝑚𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡
𝑑𝑛 = (𝐶𝑂 − 𝐶𝐿 )
𝑠𝑢𝑚 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 ′ 𝑑𝑖𝑔𝑖𝑡𝑠

𝐿 (𝐿+1)
𝑠𝑢𝑚 𝑜𝑓 𝑑𝑖𝑔𝑖𝑡𝑠 = 2

Sample Problem:

Problem 1.) The Monster company purchased a machine on January 1, 2015. The relevant
information is given below:
- Cost of the machine: ₱250,000
- Expected useful life of machine: 5 years
- Salvage value: ₱25,000
 Find: Prepare a schedule showing the depreciation expense of each year of the useful life
of the machine using sum of years’ digits method
Solution:
Remaining Depreciation
Depreciation Depreciation Book
Year life of during the
factor cost value
machine year
1 5 5/15 225,000 75,000 175,000
2 4 4/15 225,000 60,000 115,000
3 3 3/15 225,000 45,000 70,000
4 2 2/15 225,000 30,000 40,000
5 1 1/15 225,000 15,000 25,000
Σ = 15 225,000

• Depreciable cost = 𝐶𝑂 − 𝐶𝐿
₱250,000 – ₱25,000 = ₱𝟐𝟐𝟓, 𝟎𝟎𝟎
• Depreciation at the end of the first year: (5/15)(₱225,000) = ₱75,000
• Book value at the end of the first year: ₱250,000 – ₱75,000 = ₱175,000

Notice that as the remaining life of the machine decreases, the depreciation
expense also decreases.

Problem 2.) A structure costs ₱12,000 new. It is estimated to have a life of 5 years with a
salvage value at the end of life of ₱1,000. Determine the book value at the end of each year
of life.
Find: book value at the end of each year
Solution:

Remaining Depreciation
Depreciation Depreciation
Year life of during the Book value
factor cost
machine year
1 5 5/15 11,000 3,667 8,333
2 4 4/15 11,000 2,933 5,400
3 3 3/15 11,000 2,200 3,200
4 2 2/15 11,000 1,467 1,733
5 1 1/15 11,000 733 1,000
Σ = 15 11,000

• Depreciable cost = 𝐶𝑂 − 𝐶𝐿
₱12,000 – ₱1,000 = ₱𝟏𝟏, 𝟎𝟎𝟎
• Depreciation at the end of the first year: (5/15)(₱11,000) = ₱3,667
• Book value at the end of the first year: ₱12,000 – ₱3,667 = ₱8,333

Problem 3.) A consortium of international telecommunication companies contracted for the

purchase and installation of a fiber optic cable linking two major cities at a total cost of
₱960 million. This amount includes freight and installation charges estimated at 10% of
 the above contracted price. If the cable shall be depreciated over a period of 15 years with
a zero salvage value:
(a) Given the sinking fund deposit factor of 0.0430 at 6% where n = 15, what is the
annual depreciation charge?
(b) What is the depreciated charge during the 8th year using the sum-of-years’-digits
method?
Solution:
𝐶𝑂 = ₱960,000,000 𝐶𝐿 = 0 𝐿 = 15
𝐶𝑂 −𝐶𝐿
(a) 𝑑= 𝐹
,𝑖%,𝐿
𝐴
960,000,000−0
= 𝐹
,6%,15
𝐴

𝐴
= 960,000,000 (𝐹 , 6%, 15)
= 960,000,000(0.0430)

= ₱𝟒𝟏, 𝟐𝟖𝟎, 𝟎𝟎𝟎

𝐿 (𝐿+1)
(b) 𝑠𝑢𝑚 𝑜𝑓 𝑑𝑖𝑔𝑖𝑡𝑠 =
2
15 (15+1)
=
2
= 120

Remaining usefull life at 8th year = 8

𝑟𝑒𝑚𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡

𝑑𝑛 = (𝐶𝑂 − 𝐶𝐿 )
𝑠𝑢𝑚 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 ′ 𝑑𝑖𝑔𝑖𝑡𝑠
8
𝑑8 = 120 (960,000,000 − 0)
= ₱𝟔𝟒, 𝟎𝟎𝟎, 𝟎𝟎𝟎)

6. The Service-Output Method – assumes that the total depreciation that has taken place is
directly proportional to the quantity of output of the property up to that time. This method
has the advantage of making the unit cost of depreciation constant and giving low
depreciation expense during periods of low production.
Formula:
𝐶𝑂 −𝐶𝐿
𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 = 𝑇
𝐶𝑂 −𝐶𝐿
𝑑𝑛 = ( ) (𝑄𝑛 )
𝑇

Where: 𝑇 = total unit of output up the end of life

𝑄𝑛 = total number of units of output during the nth year

Sample Problem:
Problem 1.) The American company purchased a wheel loader for ₱150,000 on January 1,
2018. The information regarding usability and life of the loader is given below:
- Estimated salvage value: ₱10,000
- Estimated useful life: 10 years
- Estimated productive life in hours: 20,000 hours
- The wheel loader was used for 2,000 hours during the year 2018.
Find: depreciation expense for the year 2018
Solution:
𝐶𝑂 −𝐶𝐿
𝑑𝑛 = ( ) (𝑄𝑛 )
𝑇
150,000−10,000
𝑑1 = ( ) (2,000)
20,000
= ₱𝟏𝟒, 𝟎𝟎𝟎

Problem 2.) The Southern company uses a delivery truck whose cost is $50,000 and the
salvage value is zero. The truck has been driven 12,500 miles during the year 2018. The
company plans to retire the truck after it has been driven 250,000 miles.
Find: depreciation expense for the year 2018
Solution:
𝐶𝑂 −𝐶𝐿
𝑑𝑛 = ( ) (𝑄𝑛 )
𝑇
50,000−0
𝑑1 = ( 250,000 ) (12,500)

= ₱𝟐, 𝟓𝟎𝟎

Problem 3.) A television company purchased machinery for ₱100,000 on July 1, 2009. It is
estimated that it will have a useful life of 10 years; scrap value of 4,000, production of
400,000 units and working hour of 120,000.
The company uses the machinery for 14,000 hours in 2009 and 18,000 hours in 2010.
The machinery produces 36,000 units in 2009 and 44,000 units in 2010. Compute the
depreciation for 2010 using the following method (a) straight line, (b) working hours and
(c) output method.
Solution:
𝐶𝑂 = 100,000 𝐶𝐿 = 4,000 𝐿 = 10
𝑇 = 400,000 𝑢𝑛𝑖𝑡𝑠 𝐻 = 120,000 ℎ𝑜𝑢𝑟𝑠
𝐶𝑂 −𝐶𝐿
(a) 𝑑= 𝐿
100,000−4,000
= 10

= ₱𝟗, 𝟔𝟎𝟎

𝐶𝑂 −𝐶𝐿
(b) 𝑑=( ) (𝑄ℎ )
𝐻
100,000−4,000
=( ) (18,000)
120,000
 = ₱𝟏𝟒, 𝟒𝟎𝟎

𝐶𝑂 −𝐶𝐿
(c) 𝑑=( 𝑇
) (𝑄𝑛 )
100,000−4,000
=( ) (44,000)
400,000

= ₱𝟏𝟎, 𝟓𝟔𝟎

Valuation – or appraisal is the process of determining the value of certain property for specific
reason. The person engaged in the task of valuation is called an appraiser.
Intangible Values
1. Goodwill – is that element of value which a business has earned through the favorable
consideration and patronage of its customers arising from its well-known and well
conducted policies and operation.
2. Franchise – an item of value arising from the exclusive right of a company to provide a
specific product or service in a stated region of the country.
3. Going value – is a value which an actually operating concern has due to its operation.
4. Organization cost – is the amount of money spent in organizing a business and arranging
for its financing and building.

_____________________________________________

References/Additional Resources/Readings

C. Park (2013). Fundamentals of Engineering Economics, 3rd ed., Pearson Education, Inc.

H. Sta. Maria (n.d.). Engineering Economy 3rd ed., National Bookstore, Inc.

https://www.accountingformanagement.org/sum-of-the-years-digits-method/
Activity Sheet
ACTIVITY 3

Name: ______________________Course/Year/Section: ___________ Score: _________

Direction: Identify the following.

________________ 1. The worth of a property as shown on the accounting records of an
enterprise.
________________ 2. Sometimes called the constant percentage method or the Matheson
Formula
________________ 3. The price that can be obtained from the sale of the property after it has
been used.
________________ 4. A form of accelerated depreciation that is based on the assumption that
the productivity of the asset decreases with the passage of time.
________________ 5. The process of determining the value of certain property for specific
reason.
________________ 6. The amount which a willing buyer will pay to a willing seller for the
property where each has equal advantage and is under no compulsion
to buy or sell.
________________ 7. Method that assumes the total depreciation that has taken place is
directly proportional to the quantity of output of the property up to that
time.
________________ 8. The length of time during which it is capable of performing the function
for which it was designed and manufactured.
________________ 9. The decrease in the value of physical property with the passage of time.
________________ 10. The amount the property would sell for if disposed of as junk.

Direction: Solve the following.

1. A machine shop purchased 10 years ago a milling machine for ₱60,000. A straight-line
depreciation reserve had been provided on a 20-year life of the machine. The owner of the
machine shop desires to replace the old milling machine with a modern unit of many
advantages costing ₱100,000. It can sell the unit for ₱20,000. How much new capital will be
required for the purchase? (Ans. ₱50,000)

2. Power to a remote transmitting station is provided by a Diesel-electric generator unit.

The original cost of the unit is ₱65,000. It costs ₱2,000 to ship the unit to the job site. An
additional cost of ₱3,000 was incurred for installation.
(a) Determine the annual depreciation cost by the straight-line method, if the unit has an
expected life of 10 years. The salvage value of the unit at the end of its life was
estimated at ₱5,000.
(b) Determine the annual depreciation cost by the sinking fund method. Assume that the
annual charge for depreciation as deposited in a fund drawing compound interest at the
rate of 5%. (Ans. ₱5,168)
 3. An industrial plant bought a computer set for ₱90,000. Other expenses including
installation amounted to ₱10,000. The computer set is to have a life of 17 years with a salvage
value at the end of life of ₱5,000. Determine the depreciation charge during the 13 th year and
the book value at the end of 13 years by the (a) declining balance method, (b) double declining
balance method, (c) sinking fund method at 12% and (d) SYD method. (Ans. (a) ₱1,949;
₱10,118 (b) ₱2,620; ₱19,649 (d) ₱3,105; ₱11,209

4. A telephone company purchased a microwave radio equipment for ₱6,000,000. Freight

and installation charges amounted to3% of the purchase price. If the equipment shall be
depreciated over a period of 8 years with a salvage value of 5%, determine the following:
(a) annual depreciation charge using the straight-line method. (Ans. ₱733,875)
(b) depreciation charge during the fifth year using the sum-of-years’-digit method.

5. A power supply set costs ₱7,000 last 8 years and has a salvage value at the end of life
of ₱350. Determine the depreciation charge during the 4 th year and the book value at the end
of 4 years by the (a) straight line method, (b) declining balance method, (c) SYD method, and
(d) sinking fund method with interest at 12%.
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