An Explanation of Depreciation

Sometimes it seems like your money is just walking away from you. You buy and expensive item like a car or a computer, and in one year it's worth only a fraction of its original price. This is known as DEPRECIATION, and it can be determined using and exponential decay formula.

This formula is very similar to the exponential growth formula used in determining the value of investments. The main difference in the formula is that the original price gets multiplied by a number LESS THAN ONE. We call it the "percent of value retained".

For example, if you buy a phone for $100 and find that next year it is only worth $90, it has retained 90% of its original value. The following year it will retain 90% of its present value or [(100)(.9)](.9)=81. So after two years of ownership the formula for current value would be 100(.9)^2=81.

In general this is how all depreciation works:
(original price)(% of value retained as a decimal)^(years owned)

Now let's play with this a bit to get a feel for it. Remember those pretend businesses that you created for the "Who Will Be a Millionaire Activity"?

Well let's make up some equipment to buy for those businesses. Then let's sell it after we have owned it for a while. It will be eye-opening to see how various items depreciate over time and under different depreciation rates.

FOLLOW THESE STEPS:

1. Print out the chart below in "landscape" format and make a list of 15 substantial items that you would have bought over the course of 20 years in business.
2. Make up a reasonable price for each item. If you aren't sure what to list, ask someone.
3. Select a category and matching % of retained value for each item from the choices here:

• light vehicles like cars, motorcycles, snowmobiles, etc. 68%
• heavy vehicles like trucks, backhoes, bobcats, construction vehicles, etc. 75%
• hand tools like hammers, saws, tools that you can hold, 59%
• office equipment like phones, file cabinets, desks, fax machines, etc. 72%
• computer equipment like monitors, computers, scanners, CD burners, etc. 60%
• other electronics like TV's, stereos, speakers, DVD players, etc. 70%
• furniture like chairs, tables, sofas, lamps, etc. 78%
• buildings will actually INCREASE in value, this is know as "appreciation", 107%
• land will also APPRECIATE or go UP in value as the years pass, 108%
• other specialty items, you can make up your own percentages here as long as they are reasonable and cause the item to depreciate

4. Make up a number of years of ownership and record it.

5. Write out the formula with the given information.

6. Pop the numbers into your calculator carefully and see what your item is NOW worth.

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