Depreciation

Depreciation

Depreciation

What does depreciation mean?

• Depreciation is where an item loses value over time

  • E.g. cars, mobile phones, etc

• Depreciation is usually calculated as a percentage decrease at the end of each year

  • This works the same as compound interest, but with a percentage decrease

How do I calculate depreciation?

• A similar method to compound interest can be used

• Change the multiplier to one which represents a percentage decrease

  • e.g. a decrease of 15% would be a multiplier of 0.85

• If a car worth $16 000 depreciates by 15% each year for 6 years

  • Its value will be 16 000 × 0.85⁶, which is $6034.39

• If you are asked to find the amount the value has depreciated by:

  • Find the difference between the starting value and the new value

Depreciation formula

• An alternate method is to use the following formula to calculate the final balance

  • Final balance = $P{\left(1-\frac{r}{100}\right)}^{n }$ where

    • P is the original amount,

    • r is the % increase

    • and n is the number of years

  • Note that all of $1-\frac{r}{100}$ is the multiplier

    • e.g. 0.75 for a 25% depreciation

• This formula is not given in the exam