CHAPTER XLVII

DEPRECIATION

661. Properties of various kinds, such as buildings and machinery, are constantly decreasing in value. In estimating the value of such properties from year to year it is therefore necessary to take account of such depreciation.

The following are the principal reasons for depreciation:

(1) Ordinary wear and tear due to use.

(2) Natural deterioration, such as rotting of wood and rusting of metals.

(3) New inventions and methods rendering machinery and buildings obsolete.

(4) Certain properties, such as mines and forests, become exhausted. 662. Reasons for Figuring Depreciation. The chief purpose for figuring depreciation is to obtain the true value of buildings and plant; and this is important in ascertaining the condition of a busi

The amount of depreciation must be charged as general or overhead expenses, and these forms are important elements in the cost of carrying on the business.

A method com

663. One Method of Charging Depreciation. monly used in charging depreciation is to deduct the same rate per cent each year of the value at the beginning of the year.

Example. An automobile is worth when new $1500. Charging a depreciation of 30% each year, what is its value at the end of three years? And what is each year's depreciation?

Solution.

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$1050

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$ 735

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$ 514.5

The value at the end of 1st year is 70% of $1500 The value at the end of 2d year is 70% of $1050 The value at the end of 3d year is 70% of $ 735 The depreciations for the successive years are $450, $315, $220.50. From this example it will be seen that when figured in this manner the depreciation decreases from year to year. This is as it should be, since the

expense for repairs increases from year to year. The depreciation plus repair expenses should be the same from year to year, it being assumed that the plant is kept in uniform efficiency. This method of computing depreciation more nearly fulfills this requirement than the other in general vogue. In many businesses special rules are required for computing depreciation from year to

year.

It is obvious that this method of figuring depreciation is not applicable to the last few years before the building or machine becomes absolutely worthless, for by this method the property would never become worthless.

664. Uniform Depreciation. In some cases the element of repairs does not enter at all.

Thus, suppose a team of draft horses is worth $600 when 5 years of age and $250 when 12 years of age, but that the immediate effectiveness of the team has not changed during this time. To distribute the depreciation uniformly over the 7 years, we have 350 ÷ 7 50 as the yearly depreciation. In reality the problem is more complicated and the student is referred to any treatise on the mathematics of investment.

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PROBLEMS

In solving the following exercises use the method of § 663.

1. A building worth $100,000 depreciates 4% yearly. much is it worth at the end of 10 years?

How

2. A threshing machine and engine costing $2500 depreciates 20% yearly for 5 years. Find its value at the end of this period.

3. A grading outfit consisting of steam shovels, teams, scrapers, plows, etc., costs $150,000. If it depreciates at the rate of 25% per year, what is the daily charge for depreciation during the fourth year, the average number of days which it is used each being 150? 4. A dwelling costing $12,000 depreciates at the rate of 6% per year. It is rented for $100 per month. During the fifth year the cost of repairs is $125 and taxes $140. What rate per cent on the investment is realized this year?

Suggestion. Deduct the taxes, repairs, and depreciation from the rent.

5. An ocean liner costing $1,250,000 depreciates at the rate of 8% per year for 10 years. How much is it worth at the end of this period?