Depreciation is the loss in value over time the property is being used.

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1 Module Depreciatio Dr Tareq Albahri 206 Depreciatio is the loss i value over time the property is beig used. Cases of depreciatio:-. Actio of elemets 2. Wear ad tear from use القيمة الدفترية Book value انخفاض القيمة Depreciatio Depreciatio Methods. Straight lie 2. Decliig balace (icludig double decliig). Decliig balace switchig to straight lie [] Straight-lie depreciatio Assumes the value of a asset decreases at a costat rate Dt = P F B t = B t D t P = first cost of the asset; F = estimated salvage value; Bt = book value at the ed of year t; Dt = depreciatio charge durig year t; = estimated life of the asset. Example P02: Straight-lie depreciatio For a asset that has a first cost of $,000 ad a estimated salvage value of. If the estimated life is years, what is the aual depreciatio charge ad book value? The depreciatio per year will be Dt = P F $,000 = =. (costat for all years) The aual depreciatio ad book value for each year are give i Table.2. Egieerig Ecoomy - 20 Dr. Tareq Albahri Kuwait Uiversity

2 2 Table.2. The straight-lie method Ed of year t Depreciatio charge durig year t (costat) Book value at ed of year t $,000 $,200 $,00 $2,600 $,800 $, Shortcut The book value after t umber of years is give by the followig equatio P F B v = P ( ) t I the above example the book value at year is calculated by the above equatio $,000 B v = $,000 ( ) = $2,600 [2] Decliig-balace depreciatio Assumes the value of a asset decreases at a costat percetage α Example: P0 For a asset with a $,000 first cost, a estimated life of years, ad a depreciatio rate of 0% per year, what is the aual depreciatio charge ad book value? The aual depreciatio ad book value for each year are give i Table.. Egieerig Ecoomy - 20 Dr. Tareq Albahri Kuwait Uiversity

3 Table.. The decliig-balace method Ed of year t Depreciatio charge durig year t Book value at ed of year t (0.0) ($,000)=$,00 (0.0) ($,00)=$,00 (0.0) ($2,0)=$7 (0.0) ($,7)=$ (0.0) ($,200)=$60 $,000 $,00 $2,0 $,7 $,200 $80 $, Shortcut The book value after t umber of years is give by the followig equatio B v = P( α) t I the above example the book value at year is calculated by the above equatio B v = $,000( 0.) = $,7 Double-decliig depreciatio For tax purposes the maximum allowable depreciatio rate usig decliig-balace depreciatio is α = 2/. For the above example α = 2/ = 0. (or 0%). Egieerig Ecoomy - 20 Dr. Tareq Albahri Kuwait Uiversity

4 [] Decliig balace switchig to straight-lie depreciatio Assumes the value of a asset decreases at a costat percetage first the at a costat rate. Example: For a asset with a $,000 first cost, a estimated life of years, ad a depreciatio rate of 0% per year, what is the aual depreciatio charge ad book value usig decliig-balace switchig to straight lie method? Assume a salvage value of zero whe eeded. The aual depreciatio ad book value for each year are give i Table.. Table.. The double-decliig switchig to straight-lie method Decliig-balace depreciatio Straight-lie depreciatio 0 - $,000 BV (0.)(,000) =,00 [Larger] 2 (0.)(,00) =,00 [Larger] (,000 0 ) =,000,000,00 =,00 (,00 0 ) = 87,00,00 = 2,0 (0.)(2,0) = 7 ( 2,0 0 ) = 87 [Larger] 2,0 87 =,6 87,6 87 = = - ( zero ) Switch $, Egieerig Ecoomy - 20 Dr. Tareq Albahri Kuwait Uiversity

5 Homework Problems: (Due oe week from today). A cetral air-coditioig uit was purchased for $20,000 ad had a expected life of 0 years. The salvage value for the uit at that time was expected to be $0,000. What will be the book value at the ed of 7 years for the basic depreciatio methods of (a) straight lie, ad (b) double decliig balace? 2. A machie acquired at a cost of $2,000 had a estimated life of years. Residual salvage value was estimated to be $,00. a. Determie the aual depreciatio charges durig the useful life of the machie usig basic straight-lie depreciatio. b. What depreciatio rate makes the book value at the ed of years equal to the estimated salvage value if the basic decliig-balace method of depreciatio is used? Aswer: a = A special-purpose machie was purchased for $200,000 with a expected life of 2 years. If its salvage value is expected to be zero, what will be the depreciatio charge i the first ad fifth years ad what will be the book value at the ed of the third year for (a) basic straight-lie depreciatio, ad (b) basic double-decliig-balace depreciatio? Egieerig Ecoomy - 20 Dr. Tareq Albahri Kuwait Uiversity

Economics of Generating Stations. - Definition - Factors affecting cost of generation - Methods of determining depreciation

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