Equipment Depreciation

Introduction:

Depreciation is defined as the decrease in the market value for any item, since we engineers and specially engineers who represent their monitor & control department have to take some decisions regarding buying or renting an equipment we have to study few factors such as Equipment Owning and Operating Cost, However one of the most important factors regarding owning cost is Depreciation.

How to calculate Equipment Depreciation?

We have three main techniques (Methods) to calculate the Depreciation for an Equipment which are:

• Straight Line Method.
  
• Sum of Years-Digits Method.
  
• Double Declining Balance Method.
  

• Straight Line Method:
  

This technique is considered as the simplest method for calculating depreciation as it gives a result of an equal depreciation amount each year of the equipment life cycle.

Here we will find the formula that calculates the depreciation as per the assumption of “Straight Line Method”:

Where:

• Dn: is the annual depreciation amount
  
• n: Years of life cycle of equipment
  
• Cost: is the initial cost of the equipment
  
• Salvage: is the Salvage Value of the equipment at the end of the equipment life cycle.
  
• N: Equipment Life Cycle
  

Example:

We will assume that we purchased an equipment for 80,000 $ that we will be using it for 7 years and it is expected that the salvage value for this equipment after the five years is 10,000 $

If we used the “Straight Line Method” we will say that:

D1,2,3,4,5,6,7 =     = 10,000 $

Which means that every year this equipment is used it will lose 10,000 of its market value.

• Sum of Years-Digits Method:
  

Unlike the previous Method, “Sum of Years-Digits Method” assumes that the depreciation is not distributed equally among the equipment life cycle which is more likely to happen as it links between the value of the equipment at the end of the year and depreciation.

This technique assumes that the maximum depreciation value is in the first year, then it decreases each year in a gradual way.

The formula for this technique is as the following:

Where:

• Dn: is the annual depreciation amount
  
• n: Years of life cycle of equipment
  
• No. of Years: This term represent the remaining years in the equipment life cycle.
  
• 
  : Sum. Of all years
  
• Amount of Depreciation : (Initial Cost – Salvage Value )
  

Example

However, If we applied this technique on the previous example the results will be as the following:

D1 = ( 7 / (1+2+3+4+5+6+7) ) x (80,000 – 10,000) = 17,500 $

D2 = ( 6 / (1+2+3+4+5+6+7) ) x (80,000 – 10,000) = 15,000 $

D3 = ( 5 / (1+2+3+4+5+6+7) ) x (80,000 – 10,000) = 12,500 $

D4 = ( 4 / (1+2+3+4+5+6+7) ) x (80,000 – 10,000) = 10,000 $

D5 = ( 3 / (1+2+3+4+5+6+7) ) x (80,000 – 10,000) = 7,500 $

D6 = ( 2 / (1+2+3+4+5+6+7) ) x (80,000 – 10,000) = 5,000 $

D7 = ( 1 / (1+2+3+4+5+6+7) ) x (80,000 – 10,000) = 2,500 $

• Double Declining Balance Method
  

This technique is similar to “Sum of Years-Digits Method” as it assumes the maximum depreciation is in the first year of the equipment life cycle.

The main difference between this technique and other techniques that the reduction of the equipment value is not equaled to its salvage value.

The formula for this technique is as the following:

• Dn: is the annual depreciation amount
  
• n: Years of life cycle of equipment
  
• (2/N): Annual Depreciation Factor
  

Example:

Using the first Example Data, but applying this technique the results will be as the following:

The Annual Depreciation factor = (2/N) = 2/7 = 0.285

D1 = (2/N) x Equipment Value at the beginning of the year = 0.285 x 80,000 = 22,857.14 $

D2 = 0.285 x (80,000 $ – 22,857.14 $) = 0.285 x 57,142.86 = 16,326.53 $

D3 = 0.285 x (40,816.33 $) =11,661.81 $

D4 = 0.285 x (29,154.52 $) = 8,329.86 $

D5 = 0.285 x (20,824.66 $) = 5,949.90 $

D6 = 0.285 x (14,874.75 $) = 4,249.93 $

D7 = 0.285 x (10,624.82 $) = 3,035.66 $