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📖 Lesson 7 ⏱ ~30 min Year 10 · Unit 1 ⚡ +50 XP

Depreciation and Financial Decision Making

Not everything gains value. Learn how cars, equipment and technology lose value over time, and how to make smart financial comparisons.

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Worksheet

Worksheet

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Warm-up
Think First
+5 XP each

Q1 · What do you already know about why cars and technology lose value over time?

Q2 · A new car costs $40,000 and loses about $5,000 in value each year. Predict its value after 3 years and explain your reasoning.

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From the lesson
Intentions

Learning Intentions

Know

  • The formulas for straight-line and reducing balance depreciation.
  • How to calculate book value after depreciation.

Understand

  • Why reducing balance depreciation is more realistic for assets like cars and technology.
  • How to compare financial options using total cost over time.

Can Do

  • Calculate straight-line and reducing balance depreciation.
  • Compare total costs of buying vs leasing or different loan options.
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From the lesson
Success Criteria

Success Criteria

  • I can calculate book value using straight-line depreciation.
  • I can calculate book value using reducing balance depreciation.
  • I can compare two depreciation methods and explain which is more appropriate for a given asset.
  • I can evaluate financial decisions by calculating total cost over a set period.
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From the lesson
Key Terms

Key Terms

Depreciation — The decrease in value of an asset over time due to wear, age or obsolescence.
Straight-line depreciation — The asset loses the same dollar amount of value each year.
Reducing balance depreciation — The asset loses a fixed percentage of its current value each year.
Book value — The current value of an asset after accounting for depreciation.
Scrap value — The estimated value of an asset at the end of its useful life.
Total cost of ownership — Purchase price plus ongoing costs minus resale value.
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From the lesson
Misconceptions

Common Mistakes to Avoid

Wrong: “Straight-line and reducing balance give the same total depreciation over the asset's life.” They do if the scrap value is zero, but the pattern of depreciation is very different.

Right: Straight-line is constant each year. Reducing balance is larger in early years and smaller later. Choose the method that best matches how the asset actually loses value.

Wrong: “Depreciation means the asset is worthless.” Depreciation is an accounting estimate. The asset may still have resale or scrap value.

Right: Book value = Original value - accumulated depreciation. It can never go below scrap value.

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Concept
Straight-Line Depreciation
+5 XP

Straight-line depreciation is the simplest method. The asset loses the same amount of value every year. It works well for assets that wear out evenly, like office furniture or factory equipment.

Straight-Line Depreciation
$\text{Annual Depreciation} = \dfrac{\text{Original Value} - \text{Scrap Value}}{\text{Useful Life}}$
$\text{Book Value} = \text{Original Value} - (\text{Annual Depreciation} \times \text{Years})$

If no scrap value is given, assume it is zero. The book value decreases linearly (in a straight line) over time.

What to write in your book
  • Straight-line depreciation subtracts the same dollar amount every year.
  • Formula: Annual depreciation = (Original value − Scrap value) ÷ Useful life.
  • Book value = Original value − (Annual depreciation × Number of years).
A machine costs $25,000 and has a scrap value of $5,000 after 5 years. What is the annual straight-line depreciation?
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From the lesson
Worked Example 1
Worked Example 1 - Straight-Line Depreciation
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Given: A delivery van is purchased for $\$45{,}000$ with an expected scrap value of $\$5{,}000$ after 8 years.
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Find: The annual depreciation and the book value after 3 years.
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Method: Annual depreciation = $(45{,}000 - 5{,}000) / 8 = 40{,}000 / 8 = 5{,}000$. Book value after 3 years = $45{,}000 - (5{,}000 \times 3) = 30{,}000$.
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Answer: Annual depreciation is $\mathbf{\$5{,}000}$ and book value after 3 years is $\mathbf{\$30{,}000}$.
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Concept
Reducing Balance Depreciation
+5 XP

Reducing balance depreciation is more realistic for cars and technology. The asset loses a fixed percentage of its current value each year, so the dollar amount of depreciation decreases over time.

Reducing Balance Depreciation
$\text{Book Value} = P(1 - r)^n$
where $P$ = original value, $r$ = depreciation rate per period (as decimal), $n$ = number of periods
$\text{Depreciation for the year} = \text{Book Value at start of year} \times r$
Heads up

Real-World Anchor: New cars in Australia typically lose 15-20% of their value in the first year, and 10-15% each year after. This is why reducing balance is the standard method for vehicle depreciation. The Australian Taxation Office (ATO) allows businesses to choose either method for tax purposes, but most use diminishing value (reducing balance) for vehicles and computers.

What to write in your book
  • Reducing balance depreciation loses a fixed percentage of the current value each year.
  • Formula: Book value = P(1 − r)n, where P = original value, r = rate, n = time.
  • The dollar amount of depreciation is largest in the first year and gets smaller over time.
  • This method is commonly used for cars and technology in Australia.
A laptop costs $2,000 and depreciates at 20% p.a. reducing balance. What is its book value after 1 year?
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From the lesson
Worked Example 2
Worked Example 2 - Reducing Balance Depreciation
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Given: A laptop costs $\$2{,}400$ and depreciates at $25\%$ p.a. using reducing balance.
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Find: The book value after 2 years and the total depreciation.
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Method: After 1 year: $2{,}400 \times 0.75 = 1{,}800$. After 2 years: $1{,}800 \times 0.75 = 1{,}350$. Total depreciation = $2{,}400 - 1{,}350 = 1{,}050$.
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Answer: Book value after 2 years is $\mathbf{\$1{,}350}$ and total depreciation is $\mathbf{\$1{,}050}$.
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From the lesson
Worked Example 3
Worked Example 3 - Comparing Methods
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Given: A car purchased for $\$30{,}000$ is depreciated over 5 years. Straight-line assumes scrap value $\$10{,}000$. Reducing balance uses $20\%$ p.a.
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Find: The book value after 3 years for each method.
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Method: Straight-line: $(30{,}000 - 10{,}000)/5 = 4{,}000$ per year. After 3 years: $30{,}000 - 12{,}000 = 18{,}000$. Reducing balance: $30{,}000 \times (0.80)^3 = 30{,}000 \times 0.512 = 15{,}360$.
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Answer: Straight-line book value: $\mathbf{\$18{,}000}$. Reducing balance book value: $\mathbf{\$15{,}360}$. Reducing balance gives a lower book value, reflecting faster early depreciation typical of cars.
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From the lesson
Interactive

Interactive: Depreciation Comparator

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From the lesson
Practice

Your Turn

Question 1: A machine costs $12,000 and has a scrap value of $2,000 after 10 years. Calculate the annual straight-line depreciation.

Question 2: A phone costs $1,200 and depreciates at 30% p.a. reducing balance. What is its book value after 2 years?

Question 3: Which method would you recommend for a new car and why?

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From the lesson
Revisit

Revisit Your Thinking

Look back at your Think First answer about a car losing $5,000 per year. Was this straight-line or reducing balance? Calculate the book value after 3 years using both methods (assume original price $40,000 and reducing balance rate of 15% p.a.). Which method gives a more realistic result for a car?

Reflect
Revisit your thinking
reflect

Earlier you were asked: What was your first thought on this topic?

Now that you've worked through the lesson, write a fuller answer. What changed in your thinking?

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From the lesson
MCQ 1
MCQ2 marks

A machine costing $20,000 has a scrap value of $4,000 after 8 years. What is the annual straight-line depreciation?

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From the lesson
MCQ 2
MCQ2 marks

A computer system costs $5,000 and depreciates at 20% p.a. reducing balance. What is the book value after 1 year?

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MCQ 3
MCQ2 marks

Which depreciation method gives the highest book value after 3 years for the same asset?

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From the lesson
MCQ 4
MCQ2 marks

A car worth $35,000 depreciates at 18% p.a. reducing balance. What is its value after 2 years?

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MCQ 5
MCQ2 marks

An asset with no scrap value is depreciated using straight-line over 5 years. If the original value is $15,000, what is the book value after 4 years?

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From the lesson
SAQ 1
Short Answer3 marks

A manufacturing company buys industrial equipment for $80,000. They estimate a scrap value of $8,000 after 12 years.

(a) Calculate the annual straight-line depreciation. (1 mark)

(b) Calculate the book value after 7 years. (1 mark)

(c) After how many years will the book value be $32,000? (1 mark)

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From the lesson
SAQ 2
Short Answer4 marks

A photography business buys a professional camera for $4,500. The camera depreciates at 22% p.a. using reducing balance.

(a) Calculate the book value after 1 year. (1 mark)

(b) Calculate the book value after 3 years. (2 marks)

(c) Calculate the total depreciation over 3 years. (1 mark)

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From the lesson
SAQ 3
Short Answer5 marks

A small business is deciding between two vehicles for their delivery fleet.

Vehicle A: Purchase price $32,000. Straight-line depreciation over 8 years to scrap value $8,000. Annual running costs $4,500.

Vehicle B: Purchase price $28,000. Reducing balance depreciation at 18% p.a. Annual running costs $5,200.

(a) Calculate the total cost of ownership for Vehicle A over 3 years (purchase price + running costs - book value at end). (3 marks)

(b) Calculate the book value of Vehicle B after 3 years. (1 mark)

(c) Which vehicle is the better financial choice over 3 years? Justify your answer. (1 mark)

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Recap
Quick Review

Straight-line depreciation

The asset loses the same dollar amount each year.

Annual SL formula

(Original value − Scrap value) ÷ Useful life

Book value (SL)

Original value − (Annual depreciation × Years)

Reducing balance

The asset loses a fixed percentage of its current value each year.

Book value (RB)

P(1 − r)n where P = original, r = rate, n = periods

Total cost of ownership

Purchase price + running costs − resale/scrap value

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From the lesson
Real-Life Link

Real-Life Link

When you buy a car in Australia, it can lose 20% of its value the moment you drive it off the lot. After 5 years, a typical car retains only 40-50% of its original value. Understanding depreciation helps you decide whether to buy new or used, how long to keep a vehicle, and what resale value to expect. Businesses use depreciation for tax deductions - the Australian Taxation Office's simplified depreciation rules allow instant asset write-offs for items under certain thresholds, making the maths of depreciation directly relevant to Australian business owners.

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Game

Game Time!

Test your depreciation and financial decision-making skills.

Play Depreciation Challenge
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