Engineering economy lorie m. Cabanayan francisco d. Cuaresma

CHAPTER IV DEPRECIATION 
 
TERMINOLOGIES 
 
Depreciation 
– is defined as the decrease in the value of a property, such as machinery, equipment, 
building or other structure, due to the passage of time. This is due to many reasons, from 
deterioration and obsolescence to impending retirement. Depreciation cost depends upon the 
physical and economic life of the equipment and its first cost. 
Physical life of an equipment is the length of time during which it is capable of performing 
the function for which it was designed and manufactured. 
Economic life of an equipment is the length of time during which it will operate at a 
satisfactory unit. 
 
Basis (or cost basis) is the cost of acquiring an asset (purchase price) including normal costs of 
making the asset serviceable. Also referred to as unadjusted cost. 
Adjusted (cost) basis refers to changes to the original cost basis of a property caused by various 
types of improvements or casualty losses. 
VALUE is the present worth (PW) of all the future profits that are to be received though ownership 
of a particular property. 
Market Value (MV) is what will be paid by a willing buyer to a willing seller for a property 
where each has equal advantage and is under no compulsion to buy or sell. 
Salvage or residual value (SV) is the price that can be obtained from the sale of the 
property after it has been used. It is the best estimate of an asset‟s net market value at the 
end of its useful life. If used in depreciation calculations, it is referred to as estimated 
salvage (ES), representing an asset‟s terminal value. 
Useful life sometimes referred to as depreciable life, is the expected period of time that a 
property will be used in a trade or business or to produce income. It is not how long the 
property will last but how long the owner expects to productively use it. 
Book Value (BV) is the worth of a property as shown on the accounting records of a 
company. Ordinarily, it means the original cost of the property less all amounts that have 
been charged as depreciation expense.