Sum of the Years Digits Depreciation and Other Accelerated Depreciation Methods

why use accelerated depreciation

By Joshua Kennon. Investing for Beginners Expert

Thanks to his straight-forward approach and ability to simplify complex topics, Joshua Kennon's series of lessons on financial statement analysis have been used by managers, investors, colleges and universities throughout the world. "If an investment idea takes more than a few sentences, or cannot be explained to a reasonably intelligent fourth grader, you've moved into speculation," Joshua insists. "Whether you're dealing with a public company such as McDonald's, or a private company such as Chanel, these are the types of firms that are easy to understand. You know where the sales originate, what the costs are, and how profits are generated. These are the types of enterprises that aren't going to cause you to wake up in the middle of the night, breaking into a cold sweat because of the sub-prime crisis or esoteric securities trading in illiquid markets. That's a huge advantage to growing your wealth. Focus on what you know, pay a fair price, and

invest for the long-term.

Example:

10 years useful life = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 Sum of the years = 55

In the first year, the asset would be depreciated 10/55 in value (the fraction 10/55 is equal to 18.18%), 9/55 (16.36%) the second year, 8/55 (14.54%) the third year, etc. Going back to our example from the straight-line discussion, a $5,000 computer with a $200 salvage value and 3 years useful life would be calculated as follows:

In the first year, the computer would be depreciated by 3/6ths (50%), the second year, by 2/6 (33.33%) and the third and final year by the remaining 1/6 (16.67%). This would have translated into depreciation charges of $2,400 the first year, $1,599.84 the second year, and $800.16 the third year. The straight-line example would have simply charged $1,600 each year, distributed evenly over the three years useful life.

Source: beginnersinvest.about.com

Category: Bank

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