The depreciation rate for equipment varies depending on the operational situation of the asset and the tax laws that apply to your company. The depreciation rate is more an accounting decision than an engineering one. The engineering aspect in the depreciation rate for equipment choice is deciding how long is the operating lifetime for an equipment item.
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I want to know how we calculate the value for the depreciation rate of equipment. Want is done on other industrial sites, we apply an depreciation rate of 8 percent per year?
Dear Diaw,
You need to talk to your company accountant. There are tax rules that you must follow.
Depreciation is the annual allowance of the new asset value that you set, in order to know how much money to put aside each year, so that you can replace the asset with a new one when its working life is depleted.
Depreciation is a great idea. In theory it is like keeping a piggy-bank into which you stuff money for a rainy day. The rainy day arrives when the life of the physical asset expires and it is no longer economically worth keeping. The money you have been collecting in the piggy bank is then taken out to buy a new asset that replaces the old one.
Asset depreciation rate depends on industry and on the equipment service. There is no standard value for physical asset depreciation rate. Your accountants need to decide the length of time over which an asset gets old enough to be replaced. Typically they ask an engineer familiar with the plant operation to make that estimate.
In high attrition industries the depreciation rate for plant assets is as short as three years. In more gentle industries asset life may be used up in ten years, some businesses with static equipment, like above ground tanks, might allow 50 years for depreciation of that asset.
You may even have to depreciate different pieces of plant at different rates.
There is straight line depreciation rate and there is accelerated rate of depreciation and there are other forms as well that the Taxation Department may allow.
It is a decision that each business must make for itself and be able to justify that choice to the Taxation Department.
Your accountants should be able to ask the Taxation Department what is acceptable for a type of asset.
I hope the above is useful in addressing your question on setting a depreciation rate for equipment.
My best regards to you,
Mike Sondalini
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