ENGINEERING ECONOMY

ENSC 108

Bulacan Agricultural State College

Institute of Engineering and Applied Technology
Agricultural and Biosystems Engineering
 LECTURE 6
DEPRECIATION AND DEPLETION

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 WHAT IS DEPRECIATION?

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
WHAT IS DEPRECIATION?
➢ It is defined as the decrease in the value of a
property, such as machinery, equipment, building or
other structure, due to the passage of time.
➢ Excluded from this definition are properties whose
values increase with time, such as antiques, paintings
of masters, rare stamps, rare coins and in most cases,
land.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 TYPES OF DEPRECIATION

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
TYPES OF DEPRECIATION
PHYSICAL DEPRECIATION

➢ It is due to the deterioration caused by various

chemicals and mechanical factors on the materials
composing the property.
• Rusting of metal parts
• Decay of wooden parts
• Discoloration and cracking of plastic parts

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
TYPES OF DEPRECIATION
FUNCTIONAL DEPRECIATION

➢ It is due to the decrease in the demand of the

equipment for which it was designed such as
obsolescence and changes in methods of
production.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF
DEPRECIATION

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
The methods often used to determine annual depreciation
cost are the following:
a. Straight-Line Formula (SLM)
b. Sinking Fund Formula (SFM)
c. Sum of the Years – Digit Formula (SYDM)
d. Matheson Formula / Declining Balance Formula(DBM)
e. Double Declining Balance Method
f. Service Output Method (SOM)

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
A. STRAIGHT LINE FORMULA (SLM)

➢ It is simple and is more widely used method in

evaluating depreciation. The depreciation charge
is kept constant every year.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
➢ It is defined by the formula:
𝑐𝑜 −𝑐𝐿 𝑛
d= 𝐷𝑛 = nd = (𝑐𝑜 − 𝑐𝐿 ) 𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
𝐿 𝐿

WHERE:
d = constant depreciation charge per year
𝐷𝑛 = total depreciation after n years
𝑐𝑛 = book value after n years
𝑐𝑜 = original cost
𝑐𝐿 = salvage value
L = useful life

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 SAMPLE PROBLEMS

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 1:

A machine has an initial cost of ₱50,000 and a

salvage value of ₱10,000 after 10 years. What is
the book value after five years using straight line
formula?

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱50,000
𝑐𝑜 −𝑐𝐿
𝑐𝐿 = ₱10,000 d= 𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
𝐿
L = 10 years
n = 5 years 50,000 −10,000 = 50,000 – 5(4,000)
=
10
= Php 30,000.00
= Php 4,000.00

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 2:

The cost of equipment is ₱500,000 and the cost of

installation is ₱30,000. 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 fourth year. Using straight line
method.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱500,000 𝑐𝑜 −𝑐𝐿
= ₱30,000 d= 𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
𝐿
𝑐𝐿 = ₱500,000(10%) = 530,000 – 4(96,000)
= ₱50,000 =
530,000 −50,000
= Php 146,000.00
L = 5 years 5

n = 4 years = Php 96,000.00

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
B. SINKING FUND METHOD (SFM)

➢ It is a method of evaluating the depreciation

where interest is included and still the depreciation
charge is constant every year.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
➢ It is defined by the formula:

(𝑐𝑜 −𝑐𝐿 )(𝑖) (1+𝑖)𝑛 −1 (1+𝑖)𝑛 −1

d= 𝐷𝑛 = d[ 𝑖 ] = (𝑐𝑜 − 𝑐𝐿 ) 𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
(1+𝑖)𝐿 −1 (1+𝑖)𝐿 −1

WHERE:
d = constant depreciation charge per year
𝐷𝑛 = total depreciation after n years
𝑐𝑛 = book value after n years
𝑐𝑜 = original cost
𝑐𝐿 = salvage value
L = useful life
i = interest
n = number of years
Bulacan Agricultural State College
Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 SAMPLE PROBLEMS

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 3:

A unit of welding machine cost ₱45,000 with an

estimated life of 5 years. Its salvage value is
₱2,500 find its depreciation rate of sinking fund
method. Assuming that will deposit the money to
a bank giving 8.5%. Solve for the depreciation.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱45,000 𝑐𝑜 −𝑐𝐿 (𝑖)
𝑐𝐿 = ₱2,500 d= (1+𝑖)𝐿 −1
L = 5 years
i = 8.5% =
(45,000 −2,500)(0.085)
(1+0.085)5 −1

= Php 7,172.5445

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 4:

A machine costs ₱80,000 and has an estimated salvage

value of ₱20,000 at the end of 20 years useful life.
Compute the book value at the end of 2nd year using
sinking fund method of depreciation based on 8%
interest rate.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
(1+𝑖)𝑛 −1
𝑐𝑜 = ₱80,000 𝐷𝑛 = d[ 𝑖 ]
𝑐𝐿 = ₱20,000 𝑐𝑜 −𝑐𝐿 (𝑖)
d=
L = 20 years (1+𝑖)𝐿 −1
(1+0.08)2 −1
n = 2 years = 1,311.1325[ 0.08 ]
i = 8% (80,000 −20,000)(0.08)
=
(1+0.08)20 −1 = Php 2,727.1556

= Php 1,311.1325
𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
= 80,000 – 2,727.1556
= Php 7,7272.85

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
C. SUM OF THE YEARS DIGITAL METHOD (SYDM)

➢ It is a method of evaluating depreciation where the

depreciation charge varies from year to year.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
➢ It is defined by the formula:

2(𝐿 −𝑛+1) 𝑛(2𝐿 −𝑛+1)

d= (𝑐𝑜 −𝑐𝐿 ) 𝐷𝑛 = (𝑐𝑜 − 𝑐𝐿 ) 𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
𝐿(𝐿+1) 𝐿(𝐿+1)

WHERE:
d = constant depreciation charge per year
𝐷𝑛 = total depreciation after n years
𝑐𝑛 = book value after n years
𝑐𝑜 = original cost
𝑐𝐿 = salvage value
L = useful life
n = number of years

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 SAMPLE PROBLEMS

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 5:

An asset is purchased for ₱9,000. its estimated life is

10 years, after which it will be sold for ₱1,000. Find
the book value during the third year if the sum-of-
the-years digit depreciation is used.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱9,000 𝑛(2𝐿 −𝑛+1)
𝑐𝐿 = ₱1,000 𝐷𝑛 = (𝑐𝑜 − 𝑐𝐿 )
𝐿(𝐿+1)
L = 10 years
n = 3 years =
3(2(10) −3+1)
10(10+1)
(9,000 – 1,000)

= Php 3,927.2727

𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
= 9,000 – 3,927.2727
= Php 5,072.7272
Bulacan Agricultural State College
Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 6:

A telephone company purchased a microwave

radio equipment for ₱6,000,000. Freight and installment
charges amounted to 3% of the purchased price. If the
equipment shall be depreciated over period of 8 years
with a salvage value of 5%. Determine the depreciation
charge during the 5th year using the sum of the years
digit method.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱6,000,000
= ₱6,000,000(0.03) d = 2(𝐿𝐿(𝐿+1)
−𝑛+1)
(𝑐𝑜 − 𝑐𝐿 )
= ₱6,180,000
𝑐𝐿 = ₱6,000,000(0.05) =
2(8 −5+1)
(6,180,000 – 309,000)
= ₱309,000 8(8+1)

L = 8 years = Php 652,333.3333

n = 5 years

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
D. DECLINING BALANCE METHOD (DBM) / MATHESON’S FORMULA

➢ It is a method of evaluating depreciation where the

depreciation charge is a constant percentage of
the book value at the beginning of the year. It can
be noted that the depreciation charge varies from
year to year.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
➢ It is defined by the formula:

d = 𝑐𝑜 (𝑘)(1 − 𝑘)𝑛−1 𝐶𝑛 = 𝑐𝑜 (1 − 𝑘)𝑛 𝑐𝐿 = 𝑐𝑜 (1 − 𝑘)𝐿

𝐿 𝑐𝐿 𝑛 𝐶𝑛
𝐷𝑛 = 𝑐𝑜 {(1 − 𝑘)𝑛 } k=1- =1-
𝑐𝑜 𝑐𝐿
WHERE:
d = constant depreciation charge per year
𝐷𝑛 = total depreciation after n years
𝑐𝑛 = book value after n years
𝑐𝑜 = original cost
𝑐𝐿 = salvage value
L = useful life
n = number of years
k = constant percentage in the declining book value Note: DBM is not applicable if 𝑐𝐿 = 0

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 SAMPLE PROBLEMS

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 7:

A product has a current selling price of ₱325.00. If its

selling price is expected to decline at the rate of 10%
per annum because of obsolescence, what will be its
selling price four year hence.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱325
n = 4 years 𝐶𝑛 = 𝑐𝑜 (1 − 𝑘)𝑛
k = 10%
= 325 (1 − 0.10)4

= Php. 213.2325

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 8:

A machine costing ₱45,000 is estimated to have a

salvage value of ₱4,350 when retired at the end of 6
years. Depreciation cost is computed using
constant percentage of the declining book
value. What is the annual rate of depreciation in
percent?

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱45,000
𝑐𝐿 = ₱4,350 𝑐𝐿 = 𝑐𝑜 (1 − 𝑘)𝐿
L=6
4,350 = 45,000 (1 − 𝑘)6

= 32.35%

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
E. DOUBLE DECLINING BALANCE METHOD

➢ It is a method of evaluating depreciation which is

very similar to DBM. This time the term k is simply
replaced by 2/L.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
➢ It is defined by the formula:
2𝑐𝑂 2 𝑛−1 2 𝑛 2 𝐿
d= 𝐿
(1 − 𝐿) 𝐶𝑛 = 𝑐𝑜 (1 − 𝐿) 𝑐𝐿 = 𝑐𝑜 (1 − 𝐿)

WHERE:
d = constant depreciation charge per year
𝐷𝑛 = total depreciation after n years
𝑐𝑛 = book value after n years
𝑐𝑜 = original cost
𝑐𝐿 = salvage value
L = useful life
n = number of years

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 SAMPLE PROBLEMS

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 9:

An equipment cost ₱500,000 and has a salvage

value of ₱25,000 after its 25 years of useful life.
Using double declining balanced method, what
will b the book value of the equipment at the end
of 8 years?

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱500,000 2 𝑛
𝑐𝐿 = ₱25,000 𝐶𝑛 = 𝑐𝑜 (1 − 𝐿)
n = 8 years
2 8
L = 25 = 500,000 (1 − 25)

= Php. 256,609.4366

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 10:

A machine costs ₱60,000 and the salvage value is

₱10,000 after 10 years, find the depreciation
charge at the 4th year using double declining
balanced method.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱60,000 2𝑐𝑂 2 𝑛−1
𝑐𝐿 = ₱10,000 𝑑𝑛 = (1 − 𝐿)
𝐿
n = 4 years
L = 10 2(60,000)
= 10 (1
2 4−1
− 10)

= Php. 6,144.00

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
F. SERVICE OUTPUT METHOD

➢ It is a method of evaluating depreciation based on

the actual output and time production.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
➢ SERVICE (Number of Hour Used):

d/hr. = 𝑐𝑜 −𝑐𝐿
𝑑𝑛 = (d/hr.)(𝐻𝑛 )
𝐻

WHERE:
𝐷𝑛 = total depreciation after n years
𝑐𝑜 = original cost
𝑐𝐿 = salvage value
n = number of years
H = total number of hours used within the useful life
𝐻𝑛 = number of hours used at the nth year

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPRECIATION
➢ OUTPUT (Number of Units Produced):

d/unit = 𝑐𝑜 𝑇−𝑐𝐿 𝑑𝑛 = (d/unit)(𝑇𝑛 )

WHERE:
𝐷𝑛 = total depreciation after n years
𝑐𝑜 = original cost
𝑐𝐿 = salvage value
n = number of years
T = total number of units produced within the useful life
𝑇𝑛 = number of units produced at the nth year

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 SAMPLE PROBLEMS

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 11:

A high speed sewing machine cost ₱60,000 on

March 20,1998. It is estimated that it will have a
useful life of 8 years, salvage value of ₱5,000,
production of 1920 units and working hours of
6720 hrs. If the machine is used for 600 hrs. and
produced 850 units in 1999, find the depreciation
in 1999 by service output method.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱60,000
𝑐𝐿 = ₱5,000 d/hr. = 𝑐𝑜 −𝑐𝐿
𝐻
𝑑1999 = (d/hr.)(𝐻𝑛 )
H = 6720
𝐻𝑛 = 600 =
60,000 −5,000 = 8.18(600)
6720

= Php. 4,908.00
= Php. 8.18/hr.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱60,000
𝑐𝐿 = ₱5,000 d/unit = 𝑐𝑜 𝑇−𝑐𝐿 𝑑1999 = (d/unit)(𝑇𝑛 )
T = 1920
𝑇𝑛 = 850 =
60,000 −5,000 = 28.65(850)
1920

= Php. 24352.50
= Php. 28.65/units

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 12:

A lathe machine costs ₱300,000 (brand new) with a

salvage value of ₱15,000 is expected to last for
28,500 hours in a period of 5 years. In the first year
of service it was used for 8000 hours. Compute
the depreciation for the first year and the book
value at the end of first year.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱300,000
𝑐𝐿 = ₱15,000 d/hr. = 𝑐𝑜 −𝑐𝐿
𝐻
𝑑1 = (d/hr.)(𝐻𝑛 )
H = 28,500 hrs.
𝐻𝑛 = ₱8,000 =
300,000 −15,000 = 10(8000)
28,500
n = 5 years
= Php. 80,000.00
= Php. 10/hr.
𝑐𝑛 = 𝑐𝑜 − 𝐷𝑛
= 300,000 – 80,000
= Php 220,000
Bulacan Agricultural State College
Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 WHAT IS DEPLETION?

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
WHAT IS DEPLETION?
➢ It is defined as the annual charge that is made for the
maintenance of investment in wasting assets such as
mines, timber land, oil and gas wells.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF
DEPLETION

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPLETION
A. UNIT OR FACTOR METHOD

➢ The depletion charge depends on the original cost

of the property and the number of units in the
property.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPLETION
➢ It is defined by the formula:

d/unit = 𝑐𝑇𝑜 𝑑𝑛 = (d/unit)(𝑆𝑛 )

WHERE:
𝐷𝑛 = total depletion after n years
𝑐𝑜 = original cost
n = number of years
T = total number of units available
𝑆𝑛 = number of units sold at the nth year

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 13:

A timber land area in Mindanao is estimated to have

20,000,000 units that cost ₱200,000,000. In year 1999,
500,000 units were sold. Find the depletion charge
during the year.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱200,000,000
T = 20,000,000 d/unit = 𝑇
𝑐𝑜
𝑑1 = (d/hr.)(𝐻𝑛 )
𝑆𝑛 = 500,000
=
200,000,000 = 10(500,000)
20,000,000

= Php. 5,000,000
= Php. 10/hr.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPLETION
B. PERCENTAGE OR DEPLETION ALLOWANCE METHOD

➢ The depletion charge during a year is fixed

percentage of the gross income.
Gravel, Sand, Clay 5%
Coil and Sodium Chloride 10%
Gold, Silver, Copper and Iron Ore 15%
Oil and Gas Well 22%
Sulfur, Cobalt, Lead, Nickel and Zinc 22%

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
METHODS OF EVALUATION OF DEPLETION
➢ It is defined by the formula:

d = fixed percentage, for resources (Gross Income)

d = (50%)(Net Income)

WHERE:
Net Income = Gross Income – Expenses Excluding Depletion

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Example 14:

A mining company has a gross income of ₱3,200,000

per month from the production of copper. The
monthly expenses including depletion amount to
₱2,600,000. If fixed depletion rate of copper is
15%, what is the monthly depletion allowance?

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
SAMPLE PROBLEMS
Given: Solution:
𝑐𝑜 = ₱200,000,000
T = 20,000,000 d/unit = 𝑇
𝑐𝑜
𝑑1 = (d/hr.)(𝐻𝑛 )
𝑆𝑛 = 500,000
=
200,000,000 = 10(500,000)
20,000,000

= Php. 5,000,000
= Php. 10/hr.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
 “LIFE HAS NO LIMITATIONS,
EXCEPTS THE ONE YOU MAKE”
- LES BROWN

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering
REFERENCES
• Sta. Maria, H. B. 2000. Engineering Economy. National
Bookstore. 3rd Edition
• Arreola, M.1993. Engineering Economy. Ken, Incorporated.
3rd Edition
• Engineering Mathematics Volume 2 by Gillesania
• Engineering Economics by Besavilla
• Engineering Economy – 15th Edition By W. Sullivan, et.al.

Bulacan Agricultural State College

Institute of Engineering and Applied Technology LECTURE 6: DEPRECIATION AND DEPLETION
Agricultural and Biosystems Engineering