Engineering Economy

CHAPTER 8

Depreciation

8.1 INTRODUCTION

Depreciation is defined as decrease in the value of a physical property or asset with the passage of time. A physical asset has value because it provides monetary benefits to its owner. These benefits are in the form of future cash flows resulting from (i) the use of the asset to produce salable goods or services, or (ii) the ultimate sale of the asset at the end of its useful life. Depreciation, thus, represents decrease in the value due to lessening in the ability to produce these future cash flows, as a result of several causes such as wear and tear and obsolescence.

Although, depreciation does occur, it is really difficult to determine its magnitude well in advance. Depreciation, indeed, is not an ...