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DEPRECIATION

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Depreciation is the loss in value of certain items through usage, wear and tear, age etc.

Typical items subject to depreciation:• Cars and generally all vehicles• Expensive electric/electronic equipment• Factory Machinery

Depreciation is usually given as a percentage

Depreciation is calculated the same way we calculate compound interest.

© T Madas

A farm vehicle cost £40000 when new.Each year it depreciates in value by 20%

5

4

3

2

1

13107.2016384 x 0.816384

1638420480 x 0.820480

2048025600 x 0.825600

2560032000 x 0.832000

3200040000 x 0.840000

end of yearcalculationstart of year

The truck lost £8000 from its original value in a year.

Why is not sensible to say that it will lose £8000 every year?

What will its value be in 6 years time if that was true?

© T Madas

A farm vehicle cost £40000 when new.Each year it depreciates in value by 20%

5

4

3

2

1

13107.2016384 x 0.816384

1638420480 x 0.820480

2048025600 x 0.825600

2560032000 x 0.832000

3200040000 x 0.840000

end of yearcalculationstart of year

Originalvalue

depreciation as a % multiplier

years40000x (0.8)5

© T Madas

© T Madas

A factory bought a new piece of machinery for £80000.The machinery depreciates at the rate of 10% per annum.1. Calculate the value of the machinery after 6 years.2. After how many years will this piece of machinery be worth less than £8000?Originalvalue

depreciation as a % multiplier

years80000x (0.9)6

© T Madas

A factory bought a new piece of machinery for £80000.The machinery depreciates at the rate of 10% per annum.1. Calculate the value of the machinery after 6 years.2. After how many years will this piece of machinery be worth less than £8000?

80000x (0.9)6

© T Madas

A factory bought a new piece of machinery for £80000.The machinery depreciates at the rate of 10% per annum.1. Calculate the value of the machinery after 6 years.2. After how many years will this piece of machinery be worth less than £8000?

80000x (0.9)6

© T Madas

A factory bought a new piece of machinery for £80000.The machinery depreciates at the rate of 10% per annum.1. Calculate the value of the machinery after 6 years.2. After how many years will this piece of machinery be worth less than £8000?

80000x (0.9)6 £42515.28=

n = 10 80000 x (0.9)10 ≈ £27894.28

n = 15 80000 x (0.9)15 ≈ £16471.29

n = 20 80000 x (0.9)20 ≈ £9726.13

n = 21 80000 x (0.9)21 ≈ £8753.52

n = 22 80000 x (0.9)22 ≈ £7878.17

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