ENGINEERING ECONOMY

DECLINING BALANCE
METHOD
 ENGINEERING ECONOMY
3. DECLINING BALANCE METHOD/CONSTANT PERCENTAGE METHOD/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. The ratio of the depreciation in any year to the book value at the
beginning of that year is constant throughout the life of the property and is designated by “k”, the
rate of depreciation.
Rate of depreciation:
C0 C1 C2 C3 Cn-1 Cn CL-1 CL
0 1 2 3 n-1 n L-1 L
k = 1-

d1 d2 d3 dn dL
Book Value after “n” years:
.....
Cn = C0 (1-k)n
Year Book Value at Depreciation during Book Value at the End of
Beginning of Year the Year Year
Depreciation per Year:
1 C0 d1=kC0 C1 = C0 – d1 = C0 (1-k)
dn = C0 (1-k)n-1 k
2 C1 = C0 (1-k) d2=kC1 C2 = C1 – d2 = C0 (1-k)2

3 C2 = C0 (1-k)2 d3=kC2 C3 = C2 – d3 = C0 (1-k)3 Total Depreciation after “n” years:

… … … …
n Cn-1 = C0 (1-k)n-1 dn=kCn-1 Cn = Cn-1 – dn = C0 (1-k)n
Dn = C0 - Cn
… … … …
L CL-1 = C0 (1-k)L-1 dL=kCL-1 CL = CL-1 – dL = C0 (1-k)L
 ENGINEERING ECONOMY
SAMPLE PROBLEM No. 6
A certain type of machine lose 10% of its value each year. The machine costs Php 5,000 originally.
Make out a schedule showing the yearly depreciation, the total depreciation and the book value at
the end of each year for 5 years.

Year Book Value at Depreciation during Total Depreciation at the Book Value at the End of
Beginning of Year the Year, 10% End of the Year Year

1 5,000 500 500 4,500

2 4,500 450 950 4,050

3 4,050 405 1,355 3,645

4 3,645 364.50 1,719.50 3,280.50

5 3,280.50 328.05 2,047.55 2,952.45

 ENGINEERING ECONOMY
SAMPLE PROBLEM No. 7
Determine the rate of depreciation, the total depreciation up to the end of the 8 th year and the
book value at the end of 8 years for an asset that costs P15,000 new and has an estimated scrap
value of P2,000 at the end of 10 years by the declining balance method.

(a) Declining Balance Method

k = 1- D8 = C0 – C8
k = 0.1825 or 18.25% D8 = 12,007.78
Rate of Depreciation D8 = 15,000 – 2,992.22
Total Depreciation at the
k = 1- End of 8th Year

Cn = C0 (1-k)n
C8 = 2,992.22
C8 = 15,000 (1-0.1825)8 Book Value at the End of
8 Years
 ENGINEERING ECONOMY
SAMPLE PROBLEM No. 8
The first cost of a machine is Php 1,800,00 with a salvage value of P300,000 at the end of its life
of 5 years. Determine the total depreciation after 3 years using Constant Percentage Method.
Solution:

k = 1- D5 = C 0 – C 5
k = 0.3012or 30.12%
D5 = 1,800,000 – 614,230.24
Rate of Depreciation
k = 1-
D5 = 1,185,769.76
Total Depreciation at the
End of 3RD Year

Cn = C0 (1-k)n
C3 = 1,800,000(1-0.3012)3

C3 = 614,230.24
Book Value at the End of
3 Years
 ENGINEERING ECONOMY

DOUBLE DECLINING
BALANCE METHOD
 ENGINEERING ECONOMY
4. DOUBLE DECLINING BALANCE METHOD
- This method is very similar to the declining balance method except that the rate of
depreciation k is replaced by 2/L.

DECLINING BALANCE METHOD DOUBLE DECLINING BALANCE METHOD

Rate of depreciation: Rate of depreciation:
k = 1- k =2L
Book Value after “n” years:
Book Value after “n” years: Cn = C0 (1 - )n
Cn = C0 (1-k)n Depreciation per Year:
Depreciation per Year: dn = C0 (1 - )n-1
dn = C0 (1-k)n-1 k Total Depreciation after “n” years:
Total Depreciation after “n” years: Dn = C0 - Cn
Dn = C0 - Cn
 ENGINEERING ECONOMY
SAMPLE PROBLEM No.9
Determine the rate of depreciation, the total depreciation up to the end of the 8 th year and the
book value at the end of 8 years for an asset that costs P15,000 new and has an estimated scrap
value of P2,000 at the end of 10 years by the double declining balance method.
Solution:
D8 = C0 – C8
k= D8 = 15,000 – 2,516.58

k = = 0.20 or 20% D8 = 12,483.42

Total Depreciation at the
Rate of Depreciation End of 8th Year

Cn = C0 (1-)n
C8 = 15,000(1- )8

C8 = 2,516.58
Book Value at the End of
8 Years
 ENGINEERING ECONOMY
SAMPLE PROBLEM No.10
An industrial plant bought a generator set for P90,000. Other expenses including installation
amounted to P10,000. The generator set is to have a life of 17 years with a salvage value of
P5,000. Determine the depreciation charge during the 13th year and the book value at the end of
13 years by the Double Declining Balance Method
Solution:
Cn = C0 (1- )n
k= C13 = 100,000(1- )13

k = = 0.20 or 20% C13 = 19,649.45

Rate of Depreciation Book Value at the End of
13th Year

dn = C0 (1 - )n-1

d13 = 100,000 (1 - )13-1

d13 = 2,619.93
Depreciation at 13th Year
 ENGINEERING ECONOMY

THE SUM-OF-THE-YEARS
DIGIT METHOD
 ENGINEERING ECONOMY
5. THE SUM-OF-THE YEARS DIGIT METHOD
- is one method for calculating accelerated depreciation. Accelerated depreciation uses
decreasing charge methods, providing higher depreciation costs in earlier years and lower
depreciation charges in later periods.

Let:
dn = depreciation charge during the nth year
dn = (depreciation factor) (total depreciation)
Depreciation Charge per year
reverse digit
𝑑n = ( 𝐶 0 −𝐶 𝐿 )
∑ of digits

Year Year in Reverse Depreciation Factor Depreciation during the

Sum of Digits formula
Order Year
1 5 5/15 5/15 (C0 – C1)
= (1+L)
2 4 4/15 4/15 (C0 – C1)

3 3 3/15 3/15 (C0 – C1)

4 2 2/15 2/15 (C0 – C1)

Total Depreciation Formula
5 1 1/15 1/15 (C0 – C1) Dn = (C0 -CL )
∑ of digits=15
 ENGINEERING ECONOMY
SAMPLE PROBLEM No. 11
A structure costs P12,000 new. It is estimated to have a life of 5 years with a salvage value at the
end of life of P1,000. Determine the book value at the end of each year of life.

Solution:

reverse digit
𝑑n = ( 𝐶 0 −𝐶 𝐿 )
∑ of digits

Year Year in Reverse Order Depreciation Depreciation during the Year Book Value at the End of Year
Factor

1 5 5/15 5/15 (11,000) 12,000 - 5/15 (11,000) = 8,333.33

2 4 4/15 4/15 (11,000) 8,333 - 4/15 (11,000) = 5,400
3 3 3/15 3/15 (11,000) 5,400 - 3/15 (11,000) = 3,200
4 2 2/15 2/15 (11,000) 3,200 - 2/15 (11,000) = 1,733.33
5 1 1/15 1/15 (11,000) 1733.33 - 1/15 (11,000) = 1,000

∑ of digits=15 C0 – C1 = 12,000 – 1,000 = 11,000

 ENGINEERING ECONOMY
SAMPLE PROBLEM No. 12
An equipment cost P1,200,000. At the end of its economic life of 5 years, its salvage value is
P300,000. Using sum of years digit method, what will be its book value on the 3 rd year.

Solution: = (1+5) = 15

𝐶 3 =𝐶 0 − 𝐷3
reverse digit
𝑑n = ( 𝐶 0 −𝐶 𝐿 )
∑ of digits D3 = (1,200,000 – 300,000)
= (1+L)
D3 = 720,000
𝐶 3 =1 ,200,000 − 720,000
Dn = (C0 -CL )
𝐶 3 =4 80,000
An equipment cost P60,000. At
the end of its economic life of 10
years, its salvage value is
P20,000. Using sum of years
digit method, what will be its
book value on the 7 year.
th
 ENGINEERING ECONOMY
SAMPLE PROBLEM No. 13
An industrial plant bought a generator set for P90,000. Other expenses including installation
amounted to P10,000. The generator set is to have a life of 17 years with a salvage value of
P5,000. Determine the depreciation charge during the 13th year and the book value at the end of
13 years by the SYDM.
1 17
= (1+17) =153
Solution: 2 16
3 15
5
𝑑 13= (100,000 − 5,000 ) 4 14
reverse digit 153
𝑑 = (
𝐶 −𝐶 ) 5 13
∑ of digits
n 0 𝐿
𝑑 13=3 ,104.58 6 12
7 11
= (1+L) 8 10
𝑅 𝑒𝑣𝑒𝑟𝑠𝑒 𝐷𝑖𝑔𝑖𝑡=( L − n ) +1
𝐶 13 = 𝐶 0 − 𝐷13 9 9

D13 = (100,000 – 5,000) 10 8

Dn = (C0 -CL ) 11 7
12 6
D13 = 88,790.85
13 5
C 13 =1 00,000 − 88,790.85 14 4
15 3
C13 =11,209.15 16 2
17 1