Any equipment which is purchased today will not work for ever.

This may be due to wear and tear of the equipment or obsolescence of technology.

Hence, it is to be replaced at the proper time for continuance of any business.

The replacement of the equipment at the end of its life involves money.

This must be internally generated from the earnings of the equipment.

The recovery of money from the earnings of an equipment for its replacement purpose is called depreciation fund since we
assume that the value of the equipment decreases with the passage of time.

Thus, the word “depreciation” means decrease in value of any physical asset with the passage of time.
METHODS OF DEPRECIATION

There are several methods of accounting depreciation fund. These are as

follows:

1. Straight line method of depreciation

2. Declining balance method of depreciation

3. Sum of the years—digits method of depreciation

4. Sinking-fund method of depreciation

5. Service output method of depreciation

Straight Line Method of Depreciation

In this method of depreciation, a fixed sum is charged as the depreciation amount throughout the lifetime of an asset such
that the accumulated sum at the end of the life of the asset is exactly equal to the purchase value of the asset.

Here, we make an important assumption that inflation is absent.

Let
P = first cost of the asset,
F = salvage value of the asset,
n = life of the asset,
Bt = book value of the asset at the end of the period t,
Dt = depreciation amount for the period t.

The formulae for depreciation and book value are as follows:

Dt = (P – F)/n

Bt = Bt–1 – Dt = P – t [(P – F)/n]

A company has purchased an equipment whose first cost is Rs. 1,00,000 with an estimated life of eight years. The estimated
salvage value of the equipment at the end of its lifetime is Rs. 20,000. Determine the depreciation charge and book value at
the end of various years using the straight-line method of depreciation.

Solution
P = Rs. 1,00,000
F = Rs. 20,000
n = 8 years
Dt = (P – F)/n
= (1,00,000 – 20,000)/8
= Rs. 10,000

In this method of depreciation, the value of Dt is the same for all the years. The calculations pertaining to Bt for different
values of t are summarized in table.
Dt and Bt Values under Straight line Method of Depreciation
P = Rs. 1,00,000

F = Rs. 20,000

n = 8 years

D5 = (P – F)/n
= (1,00,000 – 20,000)/8
= Rs. 10,000 (This is independent of the time period.)
Bt = P – t (P – F)/n
B5 = 1,00,000 – 5 (1,00,000 – 20,000)/8
= Rs. 50,000
Declining Balance Method of Depreciation

In this method of depreciation, a constant percentage of the book value of the previous period of the asset will be
charged as the depreciation amount for the current period.

This approach is a more realistic approach, since the depreciation charge decreases with the life of the asset which
matches with the earning potential of the asset.

The book value at the end of the life of the asset may not be exactly equal to the salvage value of the asset.

This is a major limitation of this approach.

 Let
P = first cost of the asset,
F = salvage value of the asset,
n = life of the asset,
Bt = book value of the asset at the end of the period t,
K = a fixed percentage
Dt = depreciation amount at the end of the period t.

The formulae for depreciation and book value are as follows:

Dt = K x Bt-1
Bt = Bt–1 – Dt = Bt–1 – K x Bt–1
= (1 – K) x Bt–1

The formulae for depreciation and book value in terms of P are as follows:

Dt = K(1 – K)t–1 x P
Bt = (1 – K)t x P
While availing income-tax exception for the depreciation amount paid in each year, the rate K is limited to at the most 2/n.
If this rate is used, then the corresponding approach is called the double declining balance method of depreciation.
Consider Example and demonstrate the calculations of the declining balance method of
depreciation by assuming 0.2 for K

Solution
P = Rs. 1,00,000
F = Rs. 20,000
n = 8 years
K = 0.2

The calculations pertaining to Dt and Bt for different values of t are summarized in Table using
the following formulae:
Dt = K x Bt–1
Bt = Bt–1 – Dt
Consider Example 9.1 and calculate the depreciation and the book value for period 5 using
the declining balance method of depreciation by assuming 0.2 for K.

Solution
P = Rs. 1,00,000
F = Rs. 20,000
n = 8 years
K = 0.2

Dt = K(1 – K)t –1 x P
D5 = 0.2(1 – 0.2)4 x 1,00,000
D5 = Rs. 8,192

Bt = (1 – K)t x P
B5 = (1 – 0.2)5 x 1,00,000
= Rs. 32,768
Sum-of-the-Years-Digits Method of Depreciation

In this method of depreciation also, it is assumed that the book value of the asset decreases at a
decreasing rate.
If the asset has a life of eight years, first the sum of the years is computed as

Sum of the years = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36 = n(n + 1)/2

The rate of depreciation charge for the first year is assumed as the highest and then it
decreases.
The rates of depreciation for the years 1–8, respectively are as follows: 8/36, 7/36, 6/36, 5/36,
4/36, 3/36, 2/36, and 1/36.
For any year, the depreciation is calculated by multiplying the corresponding rate of
depreciation with (P – F).
Dt = Rate x (P – F)
Bt = Bt–1 – Dt
The formulae for Dt and Bt for a specific year t are as follows:

Consider Example 9.1 and demonstrate the calculations of the sum-of-the-years-digits method of depreciation.
Solution
P = Rs. 1,00,000
F = Rs. 20,000
n = 8 years
Sum = n(n + 1)/2 = 8 9/2 = 36
The rates for years 1–8, are respectively 8/36, 7/36, 6/36, 5/36, 4/36, 3/36,
2/36 and 1/36.
The calculations of Dt and Bt for different values of t are summarized in Table using the following formulae:
Dt = Rate x (P – F)
Bt = Bt–1 – Dt
Sinking Fund Method of Depreciation

In this method of depreciation, the book value decreases at increasing rates with
respect to the life of the asset. Let
P = first cost of the asset,
F = salvage value of the asset,

n = life of the asset,

i = rate of return compounded annually,
A = the annual equivalent amount,
Bt = the book value of the asset at the end of the period t, and
Dt = the depreciation amount at the end of the period t.

The loss in value of the asset (P – F) is made available the form of cumulative depreciation amount at the end of the life of
the asset by setting up an equal depreciation amount (A) at the end of each period during the lifetime
of the asset.

A = (P – F) x [A/F, i, n]
The fixed sum depreciated at the end of every time period earns an interest at the rate of i
% compounded annually, and hence the actual depreciation amount will be in the
increasing manner with respect to the time period.

A generalized formula for Dt is Dt = (P – F) (A/F, i, n) (F/P, i, t – 1).

The formula to calculate the book value at the end of period t is

Bt = P – (P – F) (A/F, i, n) (F/A, i, t).

The above two formulae are very useful if we must calculate Dt and Bt for any specific
period.

If we calculate Dt and Bt for all the periods, then the tabular approach would be better.
Service Output Method of Depreciation

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.

Let
P = first cost of the asset
F = salvage value of the asset
X = maximum capacity of service of the asset during its lifetime
x = quantity of service rendered in a period.

Then, the depreciation is defined per unit of service rendered:

Depreciation/unit of service = (P – F)/X
Depreciation for x units of service in a period = P – F/X(x)
INTRODUCTION

A project consists of interrelated activities which are to be executed in a certain order before the entire task is completed.
The activities are interrelated in a logical sequence, which is known as precedence relationship.
An activity of a project cannot be started until all its immediately preceding activities are completed.
Some of the typical projects are as follows:

Construction of a house Commissioning of a factory

Construction of a ship Fabrication of a steam boiler
Construction of a bridge Construction of a dam
Commissioning of a power plant Shutdown maintenance of major equipment/plants
State level professional course admission process New product launching
launching a new weapon system Conducting national elections
Research to develop a new technology Construction of railway coaches
Project management is generally applied for constructing public utilities, large industrial projects, and organizing mega events.

Project management is an important field in production scheduling mainly because many of the industrial activities can also be
viewed as project management problems.

For example, fabrication of boilers, construction of railway coaches, launching satellites, product launching, organizing R&D
activities, etc. can be viewed as project management problems.

From the examples, one can recognize the fact that many of the projects are repeated either by the same organization or by
different organizations.

Though they are repeatable by nature, each project is unique.

In the case of the new product launching of an organization, the first launching will be done at some key city.

Subsequent launchings will be done at other cities as per priorities fixed by the marketing department of the organization.
The project schedule which is prepared for the first city cannot be applied to other cities without any modification
because the time estimates of different activities of the project (product launching) will be different for each city
due to environmental conditions.

In some cases, addition or deletion of some activities will take place. So, if a project is repeated at a different
place/different time, then a detailed planning effort is required.

Project is represented in the form of a network for the purpose of analytical treatment to get solutions for
scheduling and controlling its activities.

A network consists of a set of arcs which are connected meaningfully through a set of nodes. The precedence
relationship among various activities of a project can be conveniently represented using a network.
So, the collection of precedence relationships among various activities of a project is known as project network.

There are two methods of representing any project in the network form.

(i) Activities on Arrows Diagram (AOA diagram), and

(ii) Activities on Nodes Diagram (AON Diagram).

The AOA diagram is commonly used in project management. This concept is demonstrated through two examples.
A construction company has listed various activities that are involved in constructing a community hall. These are
summarized along with predecessor(s) details in Table.

Details of Activities and Predecessor(s) for Constructing Community Hall

Draw a project network for the above project.

The project network summarizing the precedence relationships of various activities of constructing the community hall is
shown in Fig. In this figure, activities A and B are concurrent activities. Activities C, E and L can be started only after
completing activity A. Activity D follows activity B. Activity F can be started only when activities C and D are completed.
One can use similar logic to infer the remaining precedence relationships in the Fig.
Nowadays, in all professional institutes, students' selection is done through a written test, group discussion and interview. Prior
to the written test, there are so many activities, which are to be performed right from deciding the date of conducting all other
events. Though the system looks simply, the precedence relationships among the activities necessitate coordination of these
activities in completing the whole task of admitting students to any professional course. A delay at any stage would lead to
ineffective operation of the system. Hence, this problem may be treated as a project consisting of activities with precedence
relationships as shown in Table. Construct a CPM network for this problem.
Precedence Relationships for Professional Course Admission Process