# UTPA STEM/CBI Courses/Engineering Economics/Depreciation Methods

Course Title: Engineering Economics
Lecture Topic: Depreciation Methods
Instructor: Sofia Carolina Maldonado
Institution: Texas A&M International University
Backwards Design
Course Objectives
Primary Objectives- By the next class period students will be able to:
Sub Objectives- The objectives will require that students be able to:
Difficulties- Students may have difficulty:
Real-World Contexts- There are many ways that students can use this material in the real-world, such as:
Model of Knowledge
Concept Map
Content Priorities
Enduring Understanding
Important to Do and Know
Worth Being Familiar with
Assessment of Learning
Formative Assessment
In Class (groups)
Homework (individual)
Summative Assessment
Legacy Cycle
OBJECTIVE
By the next class period, students will be able to:
The objectives will require that students be able to:
THE CHALLENGE
Students will be asked: How many of you own a car? Do you know how much your car is worth right now? A number of factors affect the value of your car: year, make, model, mileage, location, style, equipment, condition, etc. Suppose that you want to sell your current car and want to purchase a new one, similar to the one you have. Determine the best option.
GENERATE IDEAS
1. What is your current car’s worth? What year is your car? What is the annual depreciation rate? How do the other factors influence the price? Trade in or sell?
2. What us the book value? What is the current market value?
3. When buying a car, would you prefer a new or used? If used, can you calculate the price based on depreciation rates?
4. What other factors do you consider when buying a car?
5. Now, take a look into the future. How long are you planning to keep your new car? Which car will give you the best value in the future? Which ones hold and lose the most value over the years?
MULTIPLE PERSPECTIVES
1. Find out how much your current car is worth.
2. Students must generate a list of candidate choices and explain why these cars made it to their list.
3. Visit some websites: Kelley Blue Book (kbb.com), consumer reports, MSN autos, dealership sites, etc.
4. Discuss and identify which car is the best option based on your current car’s selling price and the new car’s purchasing price, future price, depreciation rates, and additional features.
RESEARCH & REVISE
Students should have collected all relevant data that will be used for further comparison. Students will work individually to calculate and compare the depreciation and book values of the different candidate choices and determine which car will be the best option. After all students have given a short presentation, they can get into groups and compare/revise their calculations.
TEST YOUR METTLE
Students will take quizzes individually. Students form groups and will grade each other’s quiz. They will teach each other until everyone understands the problems. A similar set of quizzes can be taken afterwards, with possible repetition on individual basis.
GO PUBLIC
Students groups will use car dealer websites to “build” their car and get an estimated price. A written report should account for multiple input factors used in the different depreciation methods and produce a comparison between them. Students must share their findings with the rest of the class.
Pre-Lesson Quiz
1. Why is depreciation important to engineering economy?
2. Why is depreciation performed?
3. Give examples of personal property.
4. Give examples of real property.
5. There are 3 different life (recovery period) values associated with a depreciable asset. Identify each by name and explain how it is correctly used.
6. Explain the difference between an accelerated depreciation method and one that is not accelerated. Give an example of each.
7. Distinguish between the declining balance method of depreciation and double declining balance method of depreciation.
8. When does MACRS depreciation switch from declining balance to straight line in the year?
9. Explain the half-year convention.
10. What is the correct relation used to determine book value after t years using MACRS depreciation?
11. Which recovery rate is most often used for comparison with other methods’ rates?
12. When do we use depletion methods instead of depreciation?
13. State the monetary limits placed on the amount of an investment (first cost) that can be recovered annually and over the expected life for both depletion methods.
Test Your Mettle Quiz
1. A machine is purchased for $1000 and has a useful life of 12 years. At the end of 12 years, the salvage value is $130. By straight-line depreciation, what is the book value of the machine at the end of 8 years?
2. An engineer with Accenture Middle East was asked to compute equipment book values for each year if B = $200,000, n = 5 years, and S = $25,000. Use both 150% DB and DDB depreciation methods.
3. Determine the book value in year 3 of a robotic arm that has a first cost of $300,000, a 5-year life, and a $60,000 salvage value, using MACRS, DDB, and SL depreciation methods.
4. A small privately-owned gold-mining company has the sales results summarized in the table below. Determine the annual percentage depletion for the gold mine.
Year Sales, tons Spot Sales Price, $/ton
1 34,300 9.68
2 50,100 10.50
3 71,900 11.23
4 85,650 12.75