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August 19th, 2011, 06:01 PM   #1
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Interest and Depreciation 2

A company buys a computer for $125,000 and houses it in a specially constructed suite at a cost of $20,000.

1) If the computer depreciates at 30%(reducing Balance) and the suite appreciates at 6%(compound), What is the book value of suite and computer after 5 years?

2) Taking computer and suite together using the reducing balance method, what is the overall depreciation rate?

Thank you!
lizartt is offline  
August 19th, 2011, 09:01 PM   #2
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Re: Interest and Depreciation 2

I don't know what method you're supposed to be using to solve this. For the suite, you can use the typical future value equation:

Where the PV will be the cost of the suite (present value = its cost today), i is the compounding rate and n is the periods. Hence:

If you aren't learning that, you can also just literally add on 6% each year and see how it comes out. And you can do the same with the depreciation: reduce it by 30% each year. (Which for accounting is what we'd do cause we'd want to know the amounts for each individual year. But I don't know what subject this is for.) You can also use something similar to the above if you want to get straight to the book value for the computer. If you reduce it by 30% each year, then its remaining value will be 70% of the prior value. So if you use 70%, you can do something similar to the above:

As for the second part, I'm not sure what they're getting at with "overall depreciation rate." Are they meaning like a "yield" in essense? That is, once you get the combined book value for both, what rate of deprecation, when used on 145,000, would land you at that book value?
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