Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Engineering Economics DepletionDepletion

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Physical assets lose value with passage of time, it is said that they depreciate in value. With the possible exception of land, this phenomenon is the characteristics of all physical assets Depreciation is the loss in value of asset over time Depreciation

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Factors Involved in Depreciation Asset cost Asset cost Service life Service life Residual value (salvage value) Residual value (salvage value) Method of depreciation Method of depreciation

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Depletion Accounting concept.Accounting concept. The depletion deduction allows for the reduction of a natural asset's valueThe depletion deduction allows for the reduction of a natural asset's value Depletion is a cost recovery system for the reduction in the natural asset’s valueDepletion is a cost recovery system for the reduction in the natural asset’s value

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Depreciation and Depletion Both depreciation and depletion are methods that are used to assess the value of a specific type of asset to the asset's lifeBoth depreciation and depletion are methods that are used to assess the value of a specific type of asset to the asset's life Depreciation, refers to assess a artificial asset’s value over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold.Depreciation, refers to assess a artificial asset’s value over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold.Depreciation Depletion refers to the allocation of the value of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Oil will deplete with time.Depletion refers to the allocation of the value of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Oil will deplete with time. Depletion

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Depreciation refers to the decline in value of tangible plant assets. Depletion is the term used to describe the decline in natural resources such as oil, or coal.Depreciation refers to the decline in value of tangible plant assets. Depletion is the term used to describe the decline in natural resources such as oil, or coal. Cost of natural resources should include acquisition costs, exploration costs, and development costs. Tangible assets used in extracting natural resources are normally set up in a separate account and depreciated individually.

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Depletion Unit Depletion Rate = Cost - Residual Value Units Coal Company purchases land for $3,000,000 from which it expects to extract 1,000,000 tons of coal, the estimated residual value is $200,000, and it mines 80,000 tons of coal in the first year. Calculate depletion for the year Unit Depletion Rate = $3,000,000 - $200,000 1,000,000 tons

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Unit Depletion Rate = Cost - Residual Value Units Unit Depletion Rate = $3,000,000 - $200,000 1,000,000 tons Unit Depletion Rate = $2.80 per ton Depletion for Year = $2.80 x 80,000 = $224,000 Depletion

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Modified Accelerated Cost Recovery System (MACRS) The Modified Accelerated Cost Recovery System (MACRS) is the method of asset depreciation. Under MACRS, all assets are divided into classes which dictate the number of years over which an asset's value will be depreciated.assetdepreciation

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Classes (USA) 3-year property - Devices for food and beverage manufacture. Tools for the manufacture of finished plastic products, fabricated metal products, and motor vehicles 5-year property - Information Systems; Computers / Peripherals Petroleum drilling equipment 7-year property - Office furniture, fixtures, and equipment 10-year property -Assets used Industry Vessels and water transportation equipment 15-year property-Telephone distribution plants Treatment plants 20-year property -Municipal sewers and vehicles

Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009 Quiz