Handbook of Civil Engineering Calculations

2. Compute the annual income required
   Combine the annual return on the invested capital with the reserve-fund deposit to obtain
   the required annual income from the asset. Or, annual return on investment =
   0.08($800,000) = $64,000. Then the required annual income - $64,000 + $186,440 =
   $250,440.

DEPLETION ACCOUNTING

BY THE UNIT METHOD

The sum of $500,000 was expended in purchasing and developing a mine. During the first
2 years, ore was extracted at these rates: first year, 20,000 tons; second year, 18,000 tons.
Originally, the mine was estimated to have a capacity of 230,000 tons, but at the begin-
ning of the second year the remaining capacity was estimated to be only 170,000 tons.
Compute the depletion allowance for the first 2 years by the unit method.

Calculation Procedure:

1. Compute the depletion allowance for the first year
   Under the unit method, it is assumed that the entire capital invested in a depleting asset is
   consumed in the venture, and the loss of capital is prorated over the life of the venture on
   the basis of the amount of mineral extracted each year. Thus, for the first year, depletion =
   $500,000(20,000/230,000) = $43,480.


2. Compute the depletion allowance for the second year
   At the beginning of the second year, the unrecovered capital is $500,000 - $43,480 =
   $456,520, and the estimated amount of ore remaining is 170,000 tons. Thus, for the sec-
   ond year, depletion - $456,520(18,000/170,000) = $48,340.

Cost Comparisons of Alternative Proposals

Annual Cost

For analytical purposes, it is desirable to convert the estimated costs associated with a
proposed scheme to an equivalent series of uniform annual payments. The annual pay-
ment thus obtained is termed the annual cost of the scheme. The interest rate applied in
making this conversion is the minimum investment rate that is considered acceptable by
the organization making the investment or incurring the costs.
Where alternative schemes are being evaluated on the basis of their annual cost, the
usual procedure is to exclude those expenses which are identical for all schemes, since
they do not affect the comparison.