Depreciation (AA/AI SL 1.4)
| Factual Questions | Conceptual Questions | Debatable Questions |
| What formula is used to calculate annual depreciation of an asset? | How does the concept of depreciation reflect the changing value of assets over time? | Is straight-line depreciation a reliable method for reflecting the actual wear and tear on assets in all industries? |
| How does changing the depreciation rate affect the value of an asset over time? | Why is it important for businesses to accurately calculate depreciation on their assets? | Does the practice of depreciating assets in financial statements provide a clear picture of a company's value? |
| At what point does an asset's value dip below a critical level that indicates the need for its replacement? | What are the financial implications of holding onto assets for too long? | Should tax regulations allow for accelerated depreciation to encourage business investment? |
The Depreciation Dilemma at Dunder Investments
Scenario: The Depreciation Dilemma at Dunder Investments
Background:
Dunder Investments provides financial advice to clients on asset management. They use an "Annual Depreciation" applet to demonstrate how the value of assets decreases over time due to depreciation, helping clients understand when to invest or divest.
Objective:
As the lead financial advisor, your mission is to use the applet to guide your client, Dwight, through the depreciation of his beet farming equipment, ensuring he understands the best time to replace his assets.
Investigation Steps:
1. Calculating Depreciation:
- Input the original cost and the annual depreciation rate into the applet.
- Explain to Dwight how depreciation is calculated each year using the formula provided.
2. Analyzing the Graph:
- Show Dwight the graph which visualizes the asset's value over time.
- Discuss the point where the asset's value dips below a critical value, indicating it's time for a replacement.
3. Exploring 'What-ifs':
- Experiment with different depreciation rates and observe the changes in the asset's value over time.
- Use this to advise Dwight on how different choices in equipment quality could affect long-term costs.
4. Making the Decision:
- Based on the applet's table of values, determine the optimal time for Dwight to replace his farming equipment.
- Ensure Dwight understands the financial implications of holding onto assets for too long.
Questions for Investigation:
1. Discovery Question:
- How does changing the depreciation rate affect the time it takes for an asset to lose half of its original value?
2. Implications of Depreciation:
- What are the tax implications of asset depreciation for Dwight's beet farm?
3. Future Planning:
- If Dwight plans to expand his farm, how should he plan for the depreciation of additional equipment?
4. Reflection:
- Reflect on the role of depreciation in making informed business decisions.
Fun Elements:
- Host a "Depreciation Derby" where clients bet on how fast different assets depreciate using the applet.
- Create a "Dwight's Beet Farm" board game, where players manage assets and apply depreciation to advance.
Through this mini-investigation, you'll not only aid Dwight in his financial planning but also illuminate the significance of depreciation in asset management.
Part 2
When the value of an asset decreases this is called depreciation.
In the case of an asset appreciating like money in the bank this brings us to compound interest. Mathematically this is all an application of geometric sequences but it's useful to be aware of some features on your calculator.
Watch these two videos for more background.
