Modelling Depreciation

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Presentation transcript:

Modelling Depreciation Learning Intentions To understand what depreciation is To know how to use the straight line method To be able to use the salvage value equation correctly

Review Question A house is worth $560,000. If it appreciates in price by 5% per quarter, how much will it be worth in 3 years time?

What is depreciation? Depreciation is when assets such as cars and computers lose their value There are 2 types of depreciation: 1) Straight line depreciation 2) Declining balance or diminished value depreciation

Straight Line Method An asset depreciates by a constant amount each year Represented on a graph by a straight line (see p63 e.g. 4) A linear function can be derived that will allow us to calculate the value of an item at any time

Remember: Order of OPERATION!! Salvage Value (S or V) Is the depreciated value of an item and is calculated by (the linear function) S = Vo – D x t Where: Vo = purchase price, D = amount of depreciation, t = time period Remember: Order of OPERATION!!

Worked Examples A car is purchased for $38,000 and depreciates by $3,350 each year. Calculate the salvage value of the car after 4 years An electrician purchases equipment for total of $40,000. The value of the equipment depreciates by $4,500 per year. When the value falls below $7,500 the equipment should be replaced. Calculate the number of years after which the equipment should be replaced

Complete the following questions from exercise 2C pages 71-72: Your task Complete the following questions from exercise 2C pages 71-72: Q1, 3, 4, 6, 7, 8, 9, 10, 11 & 12 Show all working