1. 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

2. 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?

3. 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

4. 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

5. 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!!

6. 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

7. 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