lecture 12 depletion
TRANSCRIPT
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
Engineering EconomicsEngineering EconomicsEngineering EconomicsEngineering Economics
DepletionDepletionDepletionDepletion
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
Physical assets lose value with passage of Physical assets lose value with passage of
time, it is said that they depreciate in value. time, it is said that they depreciate in value.
With the possible exception of land, this With the possible exception of land, this
phenomenon is the characteristics of all phenomenon is the characteristics of all
physical assets physical assets
Depreciation is the loss in value of asset over timeDepreciation is the loss in value of asset over time
DepreciationDepreciation
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
Factors Involved in DepreciationFactors Involved in Depreciation
Asset costAsset cost Service lifeService life Residual value (salvage value)Residual value (salvage value) Method of depreciationMethod of depreciation
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
Depletion• Accounting concept. Accounting concept.
• The depletion deduction allows for the reduction The depletion deduction allows for the reduction
of a natural asset's valueof a natural asset's value
• Depletion is a cost recovery system for the Depletion is a cost recovery system for the
reduction in the natural asset’s value reduction in the natural asset’s value
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
Depreciation and DepletionDepreciation and Depletion
• Both depreciation and depletion are methods that are used Both depreciation and depletion are methods that are used
to assess the value of a specific type of asset to the asset's lifeto 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.
• 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.
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
• DepreciationDepreciation refers to the decline in value refers to the decline in value of tangible plant assets. of tangible plant assets. DepletionDepletion is the is the term used to describe the decline in term used to describe the decline in natural resources such as oil, or coal. natural resources such as oil, or coal.
Cost of natural resources should include acquisition costs, Cost of natural resources should include acquisition costs,
exploration costs, and development costs. exploration costs, and development costs. Tangible assets Tangible assets
used in extracting natural resources are normally set up in a used in extracting natural resources are normally set up in a
separate account and depreciated individually.separate account and depreciated individually.
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
DepletionDepletion
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
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 tonUnit Depletion Rate = $2.80 per ton
Depletion for Year = $2.80 x 80,000 = $224,000Depletion for Year = $2.80 x 80,000 = $224,000
DepletionDepletion
Engineering Economics, Lecture 12, Ejaz Gul, FUIEMS, 2009
Modified Accelerated Cost Recovery Modified Accelerated Cost Recovery System (MACRS) 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.
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