Financial maths grade 11 | Depreciation #Finance

some of you watching this might already have your own car and most of you are going to be getting a car in the next couple of years the sad reality is though is that the value of your car decreases the reason for that is due to wear and tear so Parts in the engine become slightly worn and

as time goes on you’ll see that the value of your car is going to become less and less we call this depreciation so let’s look at a person named Sarah who purchases a brand new car for 200 000 Rand the car is going to depreciate at seven percent now remember we we get two different

types of ways in which money can increase or decrease it can be simple interest or compound interest it works the same with depreciation when we’re talking about depreciation the names are slightly different however when we talk about simple interest in depreciation we call it the straight

line depreciation and when we talk about compound for depreciation we call it the reducing balance let’s have a look and see what this looks like graphically so this is a graph showing Sarah’s car so let’s say that the y-axis here is the number of that’s the x-axis so

that’s the number of years and your y-axis is the value of the car well the value of the car initially starts at 200 000 Rand if the value of the car decreases on a straight line method well as the name suggests the value of the car is going to do this it’s just going to keep going down

as a straight line however if it’s the reducing balance method which is like compound interest then the value of the car is going to decrease like this instead where in the first few years which is over here the value of the car is going to decrease by quite a lot but then as time goes on the

value of the car decreases by less and less but we’ll see why this happens in this CashNews.co so let’s look at the straight line method well Sarah’s car so when she buys it it’s 200 000 Rand after the first year that car would have decreased by seven percent so how much is

that well let’s take seven percent Times by 200 000 Rand and that’s going to give us 14 000 Rand so let’s call this your one and so her new car value after one year will be 186 000 Rand but remember the way simple interest works it always uses the initial value so it’s

always going to be seven percent of 200 000. so her car is always going to decrease by fourteen thousand Rand per year so after the second year Sarah’s car would be 14 000 Rand less than what it was after one year and so it will now be worth a hundred and seventy two thousand Rand and after

the third year if it decreases by another 14 000 rent her car will then be worth a hundred and fifty eight thousand Rand so you see how simple interest works and we saw this in one of our previous CashNews.cos is that it always uses the initial value of 200 000 Rand and so just remember that the

value of her car will be 158 000 Rand in fact I will write that over here so moving on to number two is where and this is how it works more well this is more like reality where the car will reduce using the reducing balance method which is the same as compound interest so for the first year however

it’s still going to be the same as the simple interest because Sarah’s car will decrease at seven percent of 200 000 Rand and so we saw in the previous on in the first part of this question that that was 14 000 Rand and so Sarah’s car will be worth 186 000 rent after one year but

now here’s where the difference comes in going into the second year Sarah’s car is not two hundred thousand Rand anymore it’s now worth one hundred and eighty six thousand Rand and so it’s gonna decrease by seven percent of that amount and so seven percent of 186 000 is

equal to thirteen thousand and twenty Rand I had to notice that Sarah’s car is now decreasing by less than the first year because the value decreases by seven percent but remember with compound interest you always have to use the new amount and not the original amount and so Sarah’s car

after two years will be worth one hundred and seventy two thousand 980 Rand going into year three Sarah’s call will decrease by seven percent of the new amount and so it’s going to be seven percent of 172 980 Rand and that’s going to give you a value of 12 108 Rand and 60 cents so

notice that a car decreases by even less and so the value of Sarah’s car after three full years will be 160 871 and 40 cents quite interesting and what you would find if you had to see what her car would be worth after 10 years for example is that the straight line method is going to make the

cause value decrease rapidly whereas the reducing balance will decrease it at a much slower rate eventually so what we can see is that compound interest is always good well most times when you invest money yes it’s good because it makes your money grow faster when you have a value when you

have a car that’s that’s losing value well if it loses value according to the reducing balance then it loses less and less each year so that’s also good because you don’t want the value of your car to to reduce very quickly because then when you try a seller to someone you

won’t get a lot back the only downside to compound interest and we will look at this in future CashNews.cos is Inflation imagine Sarah’s car that costs 200 000 Rand well what is that same car going to be worth in a few years time if she wants to buy a new car that is

the same the same model but a brand new one in a few years time well there you’ve got something called Inflation where the value of that car is going to increase each year and that unfortunately is also going to be compound interest and so there you have it for this

CashNews.co if it was straight line method Sarah’s car would be worth 158 000 if it is the reducing balance method well then it’s 160 000. it doesn’t seem like a big difference but if we had to do this for 10 years you would see that the reducing balance would slow down

tremendously