4.1. Calculating Depreciation

Try these first

1. 1.

   What is depreciation?

   Hint

   Think about what happens to a car's value after a few years.

2. 2.

   What are two components of investment costs?

   Hint

   Consider both borrowed money and money you could have invested.

3. 3.

   What does depreciation refer to?

   • A decrease in asset values over time
   • An increase in asset value
   • Operational costs

   Hint

   Think about your car's value as it ages.

4. 4.

   True or False: Investment costs only refer to loans taken for purchasing machines.

   • True
   • False

   Hint

   Consider if there are other factors to account for.

5. 5.

   Calculate the total ownership cost for a piece of machinery with a purchase price of $100,000, salvage value of$10,000, a useful life of 10 years, with investment cost at 7%, insurance at 3%, taxes at 2%, and storage at 1%. Assume the average annual investment method.

   Hint

   Work systematically through each component and sum them up for total ownership cost.

6. 6.

   If the average annual investment method gives you an average investment of $45,000 for a machine, and ownership costs account for 12% of that value. What would those ownership costs be?

   Hint

   You just need to calculate a percentage of the average investment value.