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BV B
BV1
D
Book Value
BV2
BV3
SV
0 1 2 3 4 Time n
11-5 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Straight Line Depreciation
B SV
BV B Dt
n
1
dt d
n
SV BVt BVt 1 Dt
B SV
BVt B t
0 1 2 3 4 n n
Where:
t = year (t = 1, 2, 3, …n)
n = estimated service life
Dt = annual depreciation
dt = depreciation rate (the same for each year)
B = first cost / basis cost
BVt = book value at end of year t
SV = salvage value = BVn
11-6 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Declining Balance Depreciation
In this method, an asset is depreciated faster early than in
the latter portion of its service life
The depreciation is calculated based on a fixed
percentage of the book value at the beginning of any year
of the service life D .BV
t t 1
Dt 1 B
t 1
therefore,
BVt 1 B
t
thus t n t / 2 0.5
BVt B B SV
S
B
Book Value
SLD
SYD
DDB
SV
0 1 2 3 4 5 6 n
11-10 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Exercise
A man just bought a Mercedes for Rp 675.000.000,-. He expects to use that
car for 6 years after which he hopes to sell it for Rp 450.000.000,-
Calculate the book value of that piece of car each year for the next six years
using SLD, DB @ 175%, and SYD methods
COST METHOD:
This method is similar to the units-of-product depreciation method, where the depletion charge is based on the amount
of resources consumed and the initial investment.
example:
A coal mining site worth $ 3.5 billions is estimated to produce 20 million tons of coal. Last year the mine produce 2,2
million ton of coal.
The unit depletion rate = $ 3.5 billions/20 million tons = $ 175 / ton
Depletion charge = 2.2 million to x $ 175/ton = $ 33 millions
PERCENTAGE METHOD:
This method is based on the application of a fixed percentage of depletion rate for individual type of natural resource,
e.g., oil, gas. copper, etc. (max charge is 50%)
example:
The fixed percentage of depletion for coal is 10%. The coal can be sold for $ 195 /ton.
The gross depletion income = 2.2 million tons x $ 195 /ton = $ 429 millions.
Depletion rate = 10% x $ 429 millions = $ 42.9 millions
11-13 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Other Reduction in Values of Asset
REDUCED BALANCE METHOD
This method assumes assets are used more in early years, thus larger depreciation
charges made in early years
Depreciation is calculated by applying a fixed rate to the “net book value” (reduced
balance) of the asset. Where:
R
r 1 n r = depreciation rate
C n = estimated service life
R = residual value (BVt)
C = historic cost (B)
example:
The installed cost of an asphalt mixing plant is $ 1,150,000 and is estimated to serve
for 12 years. After 5 years in service this piece of plant has recorded book value of
$ 725,000. Calculate the book value at the end of 7th, 10th, and 12th year