ENGINEERING ECONOMICS

DEPRECIATION

the decrease in the value of an asset or physical property due to usage of

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

of a property 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 

of a property is what the property is worth to the owner as an

operating unit

Fair Value

is the value which is usually determined by a disinterested third-party

Book Value

sometimes called depreciated book value, is the worth of a property as

shown on the accounting records of an enterprise. Remaining undepreciated capital investment in year t

Salvage or Resale Value

is the price that can be obtained from the sale of the property after it has been used. Estimated trade in at the end of assets useful life

Types of Depreciation

Normal Depreciation

a.) Physical

b.) Functional

Depreciation due to changes in price levels

Depletion

Physical Depreciation 

is due to the lessening of the physical ability of a property

to produce results. Common causes are wear and deterioration

Functional Depreciation

Is due to the lessening in the demand for the function which the property was designed to render.

Depreciation due to changes in price levels

is almost impossible to predict and therefore is not considered in economy studies.

Physical Life

refers to the decrease in the value of a property due to the gradual

extraction of its contents.

Economic Life

is the length of time during which the property may be operated at profit.

Straight Line Depreciation Method

Most common method in computing depreciation

● The method assumes that the loss in value is directly proportional to the age of the property.

● BV decreases linearly with time

Sinking Fund Method

• A technique for depreciating an asset while generating enough money to replace it at the end of its useful life. As depreciation charges are incurred to Reflect the asset’s falling value, a matching amount of cash is invested

• In this method, an imaginary fund d called a sinking fund is invested yearly at a ratei% to amount to (FC-SV) at the end of the life of the property

Sum of Years Digit Method

the depreciation charge in this method is assumed to vary directly to the

number of years and inversely to the sum of the years digit.It is a form of

accelerated depreciation

Declining Balance Method

Sometimes called Constant Percentage, Matheson Formula, or Fixed

Percentage MethodIt is assumed that the annual cost or yearly cost of

depreciation is a fixed percentage of the Salvage value at the beginning year.

Double Declining Balance Method

This method is very similar to declining balance method except that the rate of depreciation k is required by 2/n

Service Output Method

In some situations, it may not be realistic to compute depreciation based on

time period. In such cases, the depreciation is computed based on service

rendered by an asset

Working Hours or Machine Hour Method

Under this method, hourly rate of depreciation is calculated. The cost of the

asset (less residual value if any) is divided by the estimated working hours.

The actual depreciate for any given period depends upon the working hours

during that year

BREAK-EVEN ANALYSIS

It is the point in sales where the income is equal to the capital

● It is when the sum of the variable and fixed cost are equal to the sales

income

●a method of determining when costs exactly equal to revenue

FIXED COST (FC)

 cost that do not change no matter what the circumstance is…at least in short term (Rent, Salaries, insurance etc.)

VARIABLE COST (VC)

Cost that changes in value depending on the circumstance (Raw materials,

Packaging, Labor per unit)

SALES INCOME/REVENUE (SI)

the income a business generates from the sale of goods or services.

RATE OF RETURN (ROR)

Is a measure of the effectiveness of an investment of capital and its financial

efficiency. When this method is used, it is necessary to decide whether the computed rate of return is sufficient to justify the investment. rate of return is the percentage change in the value of an investment.

Capitalized Cost (CC)

Is a cost that is incurred from the purchase of a fixed asset that is expected to

directly produce an economic benefit beyond one year or company’s normal operating cycle is an expense added to the cost basis of a fixed asset on a

company's balance sheet. Capitalized costs are incurred when building or

purchasing fixed assets.

Discount

• It is the difference between the future worth of a certain commodity and its present worth

• a deduction from the usual cost of something, typically given for prompt or advance payment or to a special category of buyers.

Trade Discount

Discount offered by the seller to induce trading is the amount by which a manufacturer reduces the retail price of a product when it sells to a reseller, rather than to the end customer

Cash Discount

• Is the reduction on the selling price offered to a buyer to induce him to

pay promptly

• Refer to an incentive that a seller offers to a buyer in return for paying a bill before the scheduled due date. In a cash discount, the seller will usually reduce the amount that the buyer owes by either a small percentage

Inflation

• It is the increase in the prices for goods and services from one year to

another, thus decreasing the purchasing power of money.

• is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.