1. Building Economy ARE 431
Dr. Mohammad A. Hassanain 1
Depreciation and Depletion
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Depreciation
 Depreciation is the decrease in value of the asset over
time, through wear, deterioration or obsolescence.
 Obsolescence occur when the asset is no longer
technologically superior to available alternatives.
 Book Value is the difference between its original costs
and the total amount of depreciation that has been
charged to date.
2
g
 Market Value is the amount of money that could be
obtained for the asset if it were sold in the market.

2. Building Economy ARE 431
Dr. Mohammad A. Hassanain 2
Methods of Depreciation
 Straight Line Depreciation (SL)
P SV
D =
P - SV
n
Where:
D = Annual depreciation
P = First cost of the asset (include purchase price, delivery
cost installation cost and other equipment related costs)
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cost, installation cost and other equipment related costs).
SV = Salvage value of the asset (the net value after dismantling
or removal costs have been subtracted from the actual
monetary value).
n = Expected depreciable life of the asset
Methods of Depreciation
BV(m) = P - mD( )
Example:
If an asset has a first cost of $50,000 with $10,000
salvage value after five years.
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a. Calculate the annual depreciation.
b. Calculate the book value of the asset after
each year.

3. Building Economy ARE 431
Dr. Mohammad A. Hassanain 3
Methods of Depreciation
a. Annual depreciation
P SV $50 000 $10 000
BV(m) = P – mD (m = 1, 2, 3, 4, 5)
b. Book value of the asset after each year.
D =
P - SV
n
=
$50,000 - $10,000
5 years
= $8,000 per year
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BV(1) = $50,000 – (1)$8,000 = $42,000
BV(2) = $50,000 – (2)$8,000 = $34,000
BV(3) = $50,000 – (3)$8,000 = $26,000
BV(4) = $50,000 – (4)$8,000 = $18,000
BV(5) = $50,000 – (5)$8,000 = $10,000 = SV
Methods of Depreciation
 Sum of the Year Digits Depreciation (SYD)
 The sum of the year digits is a rapid write-off
technique by which most of the value of the asset
is written off in the first one-third of its life.
 The mechanics of the method involve finding the
sum of the year digits from 1 through n.
 The depreciation charge for any given year is then
obtained by multiplying the first cost of the asset
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less its salvage value (P-SV) by a ratio of the
number of years remaining in the life of the asset to
the sum of year digits.

4. Building Economy ARE 431
Dr. Mohammad A. Hassanain 4
Methods of Depreciation
D =
m
Depreciable Years Remaining
S f Y Di it
(First Cost – Salvage value)
m Sum of Year Digits
D =
m
n – m + 1
SYD
(P – SV)
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Where D = Depreciation charge for any given year mm
SYD =
n (n + 1)
2
BV(m) = P -
m (n –m/2 + 0.5)
SYD
(P – SV)
Methods of Depreciation
Example:
Calculate the depreciation charge for the first threeCalculate the depreciation charge for the first three
years and the book value for year three for an asset
which had a first cost of $25,000, and a salvage value
of $4,000 and a life of eight years.
Solution:
The sum of years digits must be calculated first:
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SYD =
n (n + 1)
2
SYD = = 36
8 (8 + 1)
2

5. Building Economy ARE 431
Dr. Mohammad A. Hassanain 5
Methods of Depreciation
The depreciation charge for each of the three years:
n – m + 1
D =
m
n – m + 1
SYD
(P – SV)
D =
1
8 – 1 + 1
36
(25,000 – 4,000) = $4667
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D =
2
8 – 2 + 1
36
(25,000 – 4,000) = $4083
Methods of Depreciation
D =
3
8 – 3 + 1
36
(25,000 – 4,000) = $3500
BV(m) = P -
m (n –m/2 + 0.5)
SYD
(P – SV)
The book value for year three:
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BV(3) = 25,000 -
3 (8 –3/2 + 0.5)
36
(21,000) = $12,750

6. Building Economy ARE 431
Dr. Mohammad A. Hassanain 6
Depletion
 Depletion is applicable to natural resources which
when removed can not be re-purchased as can a
machine or building.machine or building.
 Depletion is based on the level of activity or usage, not
time as in depreciation.
 The depletion charge is calculated as follows:
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d =
Initial investment
Resource capacitym
Depletion
Example:
A company has purchased some forest land for
$350,000, from which an estimated 175 million board
feet of lumber are recoverable. Determine the
depletion charges if 15 million and 22 million board
feet are removed in the first and second years.
d =
Initial investment
Resource capacitym
=
350,000
175
= $2,000 per million board feet
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Resource capacitym 175
First Year = 2,000 (15) = $30,000
Second Year = 2,000 (22) = $44,000