Doing arithmetic that involves money: Depreciation

Whenever you purchase any item or piece of equipment, it has a specific value during the time of purchase. As time goes on, the value of such item starts to reduce as a result of several factors. When your assets loss some value over time, such event could best be described as depreciation. Thus, depreciation is the loss of value of any assets over a period of time. The following are some causes of depreciation:

• Wear and Tear: The more you use an item, the more it losses its strength and newness as a result of damage and exposure to elements like sun and humidity. Wear and tear causes any object to gradually become degraded, loosing its original value as a result.

• Decay: Decay is similar to wear and tear. This term is usually associated with bacterial activity on some natural objects that causes it to degrade and eventually becomes unusable. Mechanical objects can also decay if they are exposed to harsh weather or some other elements. Once an object decays, its value depreciates.

• Breakdown: An object usually mechanical may stop working as a result of faults or some malfunctions experienced during its use. As such, it can experience a breakdown, during which time it stops working. Its value in this state will definitely depreciate.

The above are just a few of the many reasons why depreciation or loss in value might happen to any objects or assets we purchased. Depreciation is usually expressed as a percentage of the original cost. It is usually calculated periodically - usually in years.

How to Calculate Depreciation with examples

Let us use 2 examples to see how we can calculate depreciation and arrive at some exact values.

Example 1: A tractor was purchased for $30,000. It depreciates at a rate of 6% per annum. What will be its value after 3 years.

Solution:
Origininal value = $30,000
Depreciation rate = 6%
New value after 3 years = ?

For Year 1: (6/100)x30000
= 0.06x30000
= 1800
New value after 1 year = $30,000 - $1,800 = $28,200

For Year 2: (6/100)x28200
= 0.06x28200
= 1692

New value after 2 years = $28,200 - $1,692 = $26,508

For Year 3: (6/100)x26508
= 0.06x26508
= 1590

New value after 3 years = $26,508 - $1,590 = $24,918
The new value of this tractor after 3 years would be $24,918.


Example 2: A Telephone was bought for $4000. It looses value by 20% in the first year, 15% in the second year and 10% in the 3rd and 4th yeas. What would be its value after 4 years.

** Solution**

Original value = $4000
Depreciation rates: Year 1 = 20%, Year 2 = 15%, Years 3 & 4 = 10%
New value after 4 years = ?

For Year 1: (20/100)x4000
= 0.2x4000
= 800
New value after 1 year = $4000 - $800 = $3,200

For Year 2: (15/100)x3200
= 0.15x3200
= 480

New value after 2 years = $3,200 - $480 = $2,720

For Year 3: (10/100)x2720
= 0.10x2720
= 272

New value after 4 years = $2,720 - $272 = $2,448

For Year 4: (10/100)x2448
= 0.10x2448
= 244.8

New value after 4 years = $2,448 - $244.8 = $2,203.2
The new value of this telephone after 4 years would be $2,203.2

Conclusion

It is important to know how to calculate depreciation. Every physical asset undergoes some depreciation in value over time. When you learn how to make this easy calculation, it helps you to know the value of your assets. And if you wish to purchased second-hand assets, you can easily place their proper value on them.

Related

• Doing arithmetic that involves money: Compound Interest
• Doing arithmetic that involves money: Simple Interest