Question

What is the relationship between depreciating an asset, and the terminal value of the asset?

Answer 1

Let us understand this with an example

Assume an Asset the cost of which is $ 220,000. Life of this asset is 5 years and the terminal value is $ 20,000

Year	Opening	Depreciation	Accumulated Depreciation	Closing
1	$ 220,000	$       40,000	$                                 40,000	$ 180,000
2	$ 180,000	$       40,000	$                                 80,000	$ 140,000
3	$ 140,000	$       40,000	$                              120,000	$ 100,000
4	$ 100,000	$       40,000	$                              160,000	$   60,000
5	$   60,000	$       40,000	$                              200,000	$   20,000

Now let us change the terminal value to $ 10,000 instead

Year	Opening	Depreciation	Accumulated Depreciation	Closing
1	$ 220,000	$       42,000	$                                 42,000	$ 178,000
2	$ 178,000	$       42,000	$                                 84,000	$ 136,000
3	$ 136,000	$       42,000	$                              126,000	$   94,000
4	$   94,000	$       42,000	$                              168,000	$   52,000
5	$   52,000	$       42,000	$                              210,000	$   10,000

Now let us change it to $ 40,000

Year	Opening	Depreciation	Accumulated Depreciation	Closing
1	$ 220,000	$       36,000	$                                 36,000	$ 184,000
2	$ 184,000	$       36,000	$                                 72,000	$ 148,000
3	$ 148,000	$       36,000	$                              108,000	$ 112,000
4	$ 112,000	$       36,000	$                              144,000	$   76,000
5	$   76,000	$       36,000	$                              180,000	$   40,000

Increase in terminal value leads to decrease in depreciation per year. On the contrary, a decrease in terminal value leads to increase in per year depreciation

Here is the formula

Depreciation per annum = (Cost - Terminal Value) / Useful Life