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.

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Presentation transcript:

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 An item may lose value through age, wear and tear or being outdated.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.

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 = V o  Dn WhereS is the salvage (or current) value at the end of n periods V o is the purchase price (or initial value) of the item D is the depreciation per time period n is the number of time periods

Example 1 Amanda purchased a new car for $ The car depreciated by $1800 each year until it reached it’s final value of $2000. a)What is the value of the car after 3 years? b)How long does it take to reach it’s final value? a) S = V o  Dn S =  1800 × 3 S = $ b) S = V o  Dn 2000 =  1800n  =  1800n n = 10

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 = V o  Dn 900 = 5400  D × 36  4500 =  36D D = $125 per month b) S = V o  Dn S = 5400  125 × 20 S = $2900