Depreciation

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Depreciation
Depreciation is the loss in value of items or
assets. These may include cars, computers or
investment properties. An item may lose value
through age, wear and tear or being outdated. The
initial value of an asset is its purchase price
plus any transport or installation costs. The
salvage value of an asset is its value at a
particular time is its useful life, (often the
end of its usable life). The book value or
current value is what an item is worth now. The
total depreciation of an asset during its useful
life is the difference between the initial value
and salvage value.
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Straight line depreciation
When using the straight line method of
depreciation, the item goes down in value by the
same amount each year. salvage value initial
value ? total depreciation S Vo ?
Dn Where S is the salvage (or current) value at
the end of n periods Vo is the purchase price
(or initial value) of the item D is the
depreciation per time period n is the number of
time periods
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Example 1
Amanda purchased a new car for 20 000. The car
depreciated by 1800 each year until it reached
its final value of 2000. a) What is the value
of the car after 3 years? b) How long does it
take to reach its final value?
a) S Vo ? Dn S 20 000 ? 1800 3 S
14 600 b) S Vo ? Dn 2000 20
000 ? 1800n ?18 000 ?1800n n 10
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Example 2
Chantel invests in a new camera for her
photography business. The camera originally cost
5400. The camera has an effective life of 3
years and a final value of 900. a) What is the
monthly rate of depreciation? b) What is the
value of the camera after 20 months?
a) S Vo ? Dn 900 5400 ? D
36 ?4500 ?36D D 125 per month b) S
Vo ? Dn S 5400 ? 125 20 S 2900