5/21/2018 Engineering Economey Flashcards | Quizlet

Engineering Economey 24 terms dindo2016

Depreciation Is defined as the decrease in value of physical property with the passage of
time

Value In a commercial sense, is the present worth of all future profits that are to
be received through ownership of a particular property

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
Utility or Use Value Is what the property is worth to the owner as an operating unit

Fair Value Is the value usually determined by a disinterested third party in order to
establish a price that is fair to both seller and buyer

Book Value Sometimes called depreciated book value, is the worth of property as
shown in the accounting records of an enterprise

Salvage Value Is the price that can be obtained from the sale of the property after it has
been used
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Scrap Value Is the amount of the property would sell, if disposed off as junk

Purpose of Depreciation To provide for the recovery of capital which has been invested in physical
property

Purpose of Depreciation 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 Physical Depreciation and Functional Depreciation

Physical Depreciation Is due to the reduction of the physical ability of an equipment or asset to
produce results

Functional Depreciation Is due to the reduction in the demand for the function that the equipment
or asset was designed to render. This type of depreciation is often called
obsolescence

Physical Life Is the length of time during which it is capable of performing the function
for which it is designed and manufactured

Economic Life Is the length of time during which the property may be operated at a profit

Depreciation Methods 1. Straight Line Method (SLM)

2. Sinking Fund Method (SFM)
3. Declining Balance Method (DBM)
4. Double Declining Balance Method (DDBM)
4. Sum of the Years' Digit Method (SYD)

Straight Line Method This Method assumes that the loss in value is directly proportional to the
age of the property

SLM Formula d=(Co - Cn) / n

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Cm = Co - Dm

Co = First Cost
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Cn = Cost after n years (salvage/scrap value) Only $1/month

n = Life of the Property

Dm = Total Depreciation after m years
Dm = d (m)
Cm = Book Value

Sinking Fund Method In this method of computing depreciation, it is assumed that a sinking fund
is established in which funds will accumulate for replacement purposes

SFM Formula d=(Co - Cn) / [(1+i)^n - 1 / i]

Dm = d [(1+i)^m - 1 / i]
Cm = Co - Dm

Co = First Cost
Cn = Cost after n years (salvage/scrap value)
n = Life of the Property
Dm = Total Depreciation after m years
d= annual depreciation charge
Cm = Book Value

Declining Balance Method Also called the Matheson Formula. It is assumed that the annual cost of
depreciation is a fixed percentage of the salvage value at the beginning of
the year

DBM Formula d=Co (1-k)^(m-1) k

Cm = Co(1-k)^m

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Dm = Co - Cm

k = 1 - [ m√(Cm/Co)]
k = 1 - [n√(Cn/Co)]
Cm = Book Value

DDBM Formula Cm = Co(1-(2/n))^m

Dm = Co - Cm

k = 2/n

SYD Formula dm = (Co - Cn) (rev year/∑year)

Dm = d1 + d2 + dm ....

Want to learn this set quickly? Cm = Co - Dm

∑year = (n/2)(n+1)
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rev year = (n-m) + 1 LEA RN FLASH CAR DS MATCH WR ITE

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