Notes On Depreciating Assets
Hi there. In this personal finance post, I want to cover a little bit on depreciating assets and consumer items. This topic of depreciation is a bit theoretical but knowing this can help with purchasing decisions in personal finance settings. It can also be extended to business decisions but I do not have much expertise there so I just cover the personal finance cases.
Depreciation As A Decline In Value Over Time
The concept of depreciation is used in the accounting, business and finance areas but the regular person could use it too. Depreciation refers to a drop in value of an item over time. Investopedia refers to depreciation as how much of an asset's value is used up. As soon as a brand new item is purchased, that item loses value or depreciates. Generally, people prefer new items over used items. Used cars, used clothes, used video games, used equipment in a lot of cases carry less value than their new counterparts.
Some Mathematics Involved With Depreciation
Depreciating items generally do not lose all of its value right away after purchases. The value of many items goes down over time and aims to eventually reaches 0. Items such gas stoves, cars, computers, furniture, yachts and printers still has utility until it does not work or if gets replaced by something newer and better.
If it is something like underwear, the resale price of such an item would be zero. Who wants to buy used underwear??!!
Depreciating Car Example - Constant Depreciation Annual Rate
For this example, assume that a new $20000 USD car declines in value by $1000 USD after each year of usage. The value of this car decreases until the value of the car reaches 0.
I have included a partial table for the value of this car along with a graph.
Year # | Value of Car ($USD) |
---|---|
0 | 20000 |
1 | 19000 |
2 | 18000 |
3 | 17000 |
4 | 16000 |
5 | 15000 |
6 | 14000 |
... | ... |
19 | 1000 |
20000 | 0 |
If you were to graph the above table, it would look something like the picture below. Replace the number of periods on the x-axis with the number of years.
Source: https://corporatefinanceinstitute.com/resources/knowledge/accounting/straight-line-depreciation/