Simple depreciation  (Page 2/2)

This looks similar to the formula for simple interest:

where $i$ is the annual percentage interest rate and $P$ is the principal amount.

If we replace the word interest with the word depreciation and the word principal with the words initial value we can use the same formula:

Then the book value of the asset after $n$ years is:

For example, the book value of the car after two years can be simply calculated as follows:

as expected.

Note that the difference between the simple interest calculations and the simple depreciation calculations is that while the interest adds value to the principal amount, the depreciation amount reduces value!

Salvage value

Looking at the same example of our car with an initial value of R60 000, what if we suppose that we think we would be able tosell the car at the end of the 5 year period for R10 000? We call this amount the “Salvage Value"

We are still assuming simple depreciation over a useful life of 5 years, but now instead of depreciating the full value of the asset, we will take into account the salvage value, and will only apply the depreciation to the value of the asset that we expect not to recoup, i.e. R60 000 - R10 000 = R50 000.

The annual depreciation amount is then calculated as (R60 000 - R10 000) / 5 = R10 000

In general, the formula for simple (straight line) depreciation:

Simple depreciation

1. A business buys a truck for R560 000. Over a period of 10 years the value of the truck depreciates to R0 (using the straight-line method). What is the value of the truck after 8 years ?
2. Shrek wants to buy his grandpa's donkey for R800. His grandpa is quite pleased with the offer, seeing that it only depreciated at a rate of 3% per year using the straight-line method. Grandpa bought the donkey 5 years ago. What did grandpa pay for the donkey then ?
3. Seven years ago, Rocco's drum kit cost him R 12 500. It has now been valued at R2 300. What rate of simple depreciation does this represent ?
4. Fiona buys a DsTV satellite dish for R3 000. Due to weathering, its value depreciates simply at 15% per annum. After how long will the satellite dish be worth nothing ?