---
title: "Short note: depreciation"
subject: "Engineering Economics"
chapter: 7
key: "semester_6/engineering_economics:short-note-depreciation"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/short-note-depreciation
site: BCT Engineering
---

# Short note: depreciation

Engineering Economics · Chapter 7: Depreciation and Corporate Income Taxes

- Asked in: 2065 Chaitra, 4 marks
- Video: [Introduction to Depreciation and Straight Line Depreciation - Engineering Economics Lightboard](https://www.youtube.com/watch?v=RKna33zUJWE) — Engineering Economics Guy
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/short-note-depreciation
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-7

## Question

Write a short note on depreciation.

## Short answer

Depreciation is the systematic allocation of an asset’s cost over its useful life, reflecting wear, tear, and obsolescence. It is a non-cash tax-deductible expense that generates a tax shield. Common methods: straight-line, declining balance, sum-of-years'-digits, sinking fund, and MACRS.

## Answer

**Depreciation** is the loss in the value of a physical asset because of wear and tear, ageing, obsolescence or the passage of time. In accounting it is the systematic allocation of the cost of an asset, less its salvage value, over its useful life.

#### Why it matters in engineering economy
- It is a **non-cash** charge: it is not a payment, but it is deducted from revenue to find taxable income. The tax saved = depreciation × tax rate (the *tax shield*).
- It shows the book value of the asset at any time: BV = P − accumulated depreciation.
- It is used to plan recovery of capital for replacement.

#### Causes
Physical deterioration, functional obsolescence, inadequacy, changes in requirements or law, depletion and fall in market price.

#### Main methods
| Method | Formula |
|---|---|
| Straight line | D = (P − S)/N |
| Declining balance / DDB | D_k = R × BV_(k−1); R = 2/N for DDB |
| Sum of years' digits | D_k = (P − S)(N − k + 1)/[N(N + 1)/2] |
| Sinking fund | D_k = (P − S)(A/F,i,N)(F/P,i,k − 1) |
| MACRS | cost × table percentage |

**Example:** P = Rs 1,00,000, S = Rs 10,000, N = 5. SL depreciation = 18,000 per year, so BV₂ = 64,000.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. In accounting, depreciation is best described as
   A. the cash paid each year to maintain an asset
   B. the systematic allocation of cost less salvage value over the useful life
   C. the market price fall of an asset in one year
   D. the interest paid on the asset's loan
   Answer: B. Depreciation allocates (P - S) over the useful life. (Key point: Definition)

2. Why is depreciation important in after-tax analysis even though it is not a cash payment?
   A. It is added to revenue to increase taxable income
   B. It is paid to the tax office
   C. It is deducted from revenue to find taxable income, saving tax = depreciation x tax rate
   D. It raises the salvage value
   Answer: C. As a non-cash deduction it reduces taxable income, producing the tax shield. (Key point: Tax shield)

3. For P = Rs 1,00,000, S = Rs 10,000 and N = 5, what is BV after 2 years by straight line?
   A. 64,000
   B. 82,000
   C. 60,000
   D. 72,000
   Answer: A. D = (100,000 - 10,000)/5 = 18,000; BV2 = 100,000 - 36,000 = 64,000. (Key point: Straight-line example)