This is a short exercise to consider how to calculate depreciation. This should help you understand a basic example about how a company will write off a capital asset over its useful life. The depreciation expense will be included both in your investment analysis in Week 4 and in your Pro Forma Income Statement in Week 5. 1. Yes, we can say that depreciation is a systematic method of allocating the cost of a tangible capital asset over its productive useful life, as determined by a company. We charge the depreciation expense on the income statement as just another cost of doing business. 2. Many assets can be disposed of at the end of their useful life as a used asset, and have some FMV fair market value or can be called salvage value. Many companies will use external resources to estimate the future FMV or salvage value of an asset when acquired, and then factor that salvage value into its depreciation calculation. Salvage value is part of the calculations when using the popular "straight line" method of depreciation. > For example, we acquire a new truck for $45,000 for The Cutting Edge Landscaping. We determine that its useful life is 6 years. We research and determine that a conservative FMV or salvage value in 6 years is $9,000. > The depreciation base is [cost - salvage value]. We will write off the difference over 6 years as depreciation expense. 3. Let us say that we instead decided to buy a used truck for $30,000 with a 4 year [remaining] useful life. We research and determine that a conservative, FMV or salvage value in 4 years is $8,000. QUESTIONS If we use the "straight line" method and charge the same amount of depreciation expense each year: 1. How much is the annual depreciation on my new truck? Please show your work. How much will be shown on the balance sheet as the net book value (cost minus all depreciation) after 6 years? Does that amount equal the salvage value? 2. How much is the annual depreciation on my used truck? Please show your work. How much will be shown on the balance sheet as the net book value (cost minus all depreciation) after 4 years? Does that amount equal the salvage value?