Depreciation - Reducing Balance Method

Depreciation

It is assumed that you are familiar with the concept of the depreciation in value of assets, and can calculate depreciation by the fixed rate method (also called the straight line method). This unit introduces the reader to another method of calculating depreciation that takes into account the idea that goods depreciate most rapidly just after they have been bought (if new).

Reducing Balance Method

Depreciation is calculated as a negative compound interest. This is illustrated by the following example.

Exercise

(1)		A company buys a new van at a cost of £12,000. It calculates the annual rate of depreciation at 20%. What is the value of the van at the end of 4 years?
(2)		A large fish tank depreciates at a rate of 17% per annum. If it cost £3,500 new, what is its value at the end of 6 years?
(3)		A suite of computers depreciates in value at a rate of 12%. If the equipment cost £15,000 when new, what is its value at the end of 5 years?
(4)		Equipment at a ski resort costs £40,000 when new. It depreciates in value at a rate of 16%. Make an estimate of its value at the end of 8 years. If this equipment is sold at the end of these 8 years for £5,500 has the company received a cash balance?

Solutions