Depreciation approaches

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Financial Maths - Depreciation.
General overview.

Two approaches to estimating the depreciation of an asset's value.

For any commercial enterprise or business, the concept of depreciation is very important. It requires consideration of how an asset loses value over time.

some assets lose value at a constant rate each year they are in use. A machine used to pour gold bars would operate with the same capacity over a number of years and so its value would depreciate at a constant rate over its useful life.
other assets lose more value in the first year or two and then lose less and less value per year over time as they are not so productive. For example

This distinction leads to two different approaches used to determine the value of an asset:

straight line depreciation - where an asset loses a constant amount each year;
declining balance depreciation - where an asset loses a large amount of value in the first year but the loses in value decrease as time goes on.

Mathematically we can assign techniques to both techniques as follows:

Straight line depreciation.		Use a linear model of the form Value = Original cost - rate × time ^{(which is of the same form as for a straight line or simple interest).}
Declining balance depreciation.		Use an exponential model of the form Value = Cost(1 - r%)^{n (which is of the same form as for an exponential equation or compound interest).}

Salvage value

This term "salvage value" is used to describe the value of an asset after it has depreciated for a given time and is at the end of its useful life to the owner.
It can be regarded as being the amount the owner would expect to receive from a sale of the asset.

For example, a car purchased new for say $25,000 might only have a resale value of $10,000 after six years when it is no longer useful to the owner.
That value of $10,000 is then the value after the car has depreciated and is referred to as the "salvage value".

An excellent reference to the real world is the description on the ATO site.