Comparing Costs and Depreciation Models

Front

What is depreciation?

Back

Depreciation is the reduction in the value of an asset over time, often due to wear and tear or obsolescence.

Front

What are the two main types of depreciation models?

Back

The two main types of depreciation models are linear depreciation and exponential depreciation.

Front

How does linear depreciation work?

Back

In linear depreciation, an asset loses a fixed amount of value each year.

Front

How does exponential depreciation work?

Back

In exponential depreciation, an asset loses a percentage of its value each year, leading to a decreasing amount in absolute terms.

Front

If a car costs $20,000 and depreciates linearly by $2,000 per year, what will its value be after 5 years?

Back

After 5 years, the value will be $20,000 - (5 * $2,000) = $10,000.

Front

If a car costs $25,000 and depreciates exponentially at 12% per year, what will its value be after 1 year?

Back

After 1 year, the value will be $25,000 * (1 - 0.12) = $22,000.

Front

What is the formula for calculating the value of an asset after 'n' years using linear depreciation?

Back

Value = Initial Cost - (Depreciation per Year * n)