Grade 12 Financial Maths Lesson 4| Depreciation | Inflation | Sinking funds | Mlungisi Nkosi #Finance

good day everyone once again we are back together and welcome to our channel um of course if you have not subscribed as yet just make sure that you hit that subscribe button and of course you can always get in touch with us and our email address is info at maloneysingosi.co.js all right so

we’ll be continuing with um financial mathematics and this time i want to be talking about you know depreciation and we’ll be talking about Inflation um i will somewhat uh introduce uh sinking funds but we will actually look at them more in depth in the new in the next

CashNews.co all right so uh please just stay tuned and uh let’s start our lesson all right now let’s talk about depreciation um now say for argument’s sake you buy equipment all right uh whatever form of equipment any asset that you use say for arguments sake we buy a car or a

truck all right we’re a trucking business and we buy a truck right so first of all what’s going to happen say this was a 22 2022 model of a truck but what’s going to happen with time um what’s going to happen 2023 uh 23 2024 and 2025 what’s going to happen with this

truck is that it’s going to depreciate it’s going to lose value remember what depreciation is it’s simply a loss in value of either Assets or machinery or equipment either you you lose value through use or through age all right so in this case those are what

causes depreciation but of course the more you use a car you know the less its value becomes of course uh also the longer you keep it you know the less value uh it it has so in this case there are two ways of calculating depreciation we’ve got what we call the straight line method okay so the

straight line depreciation in this case now in straight line depreciation you’ll see this more or less you know looks like simple interest formula so this is a is equals to p 1 minus i times n okay and then we’ve got what we call the reducing balance now let me first explain what

straight line means it means that you know you you that depreciation is taking place uh from the original value so you are calculating depreciation um you know from the original value of the item so for instance if you bought this truck at six hundred thousand you’d calculate that

depreciation uh for all the years you’ll calculate it at at uh six hundred thousand now the thing about the straight line method is that you can get to a point where the depreciation gets to zero balance okay so in this case uh you can depreciate an item until it absolutely has no value all

right however we also have what we call the reducing balance i’m not sure why i’m writing s there we also have reducing balance depreciation right so this is another way of calculating depreciation right now when we talk about reducing balance in this case what we are simply talking

about is well the formula first of all that you’re going to use you’ll see it uh more or less resembles that of compound interest so that’s p in this case that’s going to be 1 minus i instead to the power n now in reducing balance depreciation what we are doing is we are

calculating depreciation from the previous year’s um value okay so if i’m going to calculate depreciation at 2024 i’m not going to use the original value of 2022 but i’m going to rather use the value that it had in 2023 so with reducing balance all i’m simply doing is

calculating uh depreciation from the previous year’s value now with reducing balance you’ll always have some value uh you know that that you have so it never gets to zero balance okay right now um another important thing that you want to talk about is what we call

Inflation right so two things happen your item depreciates over time but now if you want to replace the truck say in 2025 just as an uh for argument’s sake remember the cost of buying a new truck in 2025 will not be the same as the cost of buying a new truck in 2022 and why

is that because there’s what we call Inflation right so Inflation in this case you know that’s the annual rate of increase of items so if you bought it at 600 000 let’s say for argument’s sake uh this year um you know with each year

you’d find that the price of buying the new item actually increases each year okay so that’s because of Inflation now when you calculate Inflation you’ll see that we use the very same formula as compound interest in this case uh of course this now

would in um would be the Inflation rate okay and in this case to the power n so if i want to calculate the imp uh um you know how much it will cost in 2022 i’ll use the cost in 20 i mean in 2025 that is that is uh years later if i want to find out what will be the cost in

2025 i will use the cost of 2022 right in this case it means this year’s cost all right and in this case that will be the interest rate and that will obviously be the number of years okay so what i want us to do quickly i want us to jump into an example okay and see how to apply these

principles all right now let’s take a look at this example so we’ve got a company that buys furniture at a value of 860 000 rents all right so they say that uh calculate the value of the furniture at the end of six years if depreciation is calculated at 14 percent per annum right and

then the first question says on a straight line basis okay so i want to calculate the value of it by the way another way that they could say that uh was is calculate the book value of the furniture now remember what book value is is it’s it’s the price or in this case the you know the

cost of the items um at the end of the depreciation period okay so it’s the value that it still has at the end of the depreciation period we call that the book value right now we want to calculate the book value on a straight if depreciation is calculated on a straight line basis so to answer

our first question we’re going to say well we know on a straight line basis you know a is equals to p uh 1 minus i times n right so we know the cost of the furniture was 860 000 rents okay and in this case we know our interest rate is 14 but remember they said 14 per annum so in this case it

means that we’re going to say our interest rate will be 14 divided by 100 remember that’s a percentage so in this case it means we divide by 100 so that will give us 0.14 so this will be 0.14 multiplied by the number of years they said 6 years okay right so we put that in our calculator

and i get a value of 137 000 six hundred so it means that the book value if we are using a straight line depreciation in this case the book value uh of the furniture will be a hundred and thirty six thousand uh hundred and thirty seven thousand rather six hundred trends right now the second

question that they asked us is uh calculate uh the same depreciation if now we are using a reducing balance meaning that remember what we said about reducing balance is that you are calculating the depreciation based on the previous year’s value right so it means you just keep depreciating

every year based on the previous year’s value so in this case we’re going to use a is equals to p that’s 1 minus i this is to the power n and in this case of course we know that n would be the number of years so that’s going to be eight hundred and sixty thousand rents um

one minus the interest rate is fourteen percent so that’s zero point one four and this is to the power six okay so our uh value in this case the book value if we are using straight uh reducing balance depreciation we get a value of 300 and forty seven thousand uh nine hundred okay um okay so

that’s 347 927 and 82 cents okay 82 cents okay sorry about that okay so that’s going to be 82 cents right so that would be our value our book value if we are using the um the reducing balance method okay right now let’s look at the next question and this is going to obviously

formulate the basis of our discussion for the next CashNews.co okay so they say to you calculate the cost of replacing the furniture in six years if the annual Inflation rate annual rate of Inflation is eight percent per annum so obviously our furniture is getting

old and we want to now replace it in six years time but what would it cost me to now buy new furniture in six years time so it would cost me so in this case we said to find out the cost of the new furniture we’ll just say 1 plus i to the power n remember this is the same formula that we use

for compound interest it’s the same one that we use for Inflation as well right so in this case we know that you know the present value of it is 860 000 rents okay and in this case they said the annual rate of Inflation is eight percent per annum so this is

going to be zero 0.08 okay to the power n and n is 6. okay so we put that in our calculator that’s going to be 1 plus 0.08 and in this case to the power of 6 and i get a value oh actually i made a mistake in my calculation yeah there we go um so now i get a value of 1 million okay so uh to

replace the furniture i’d have to now pay one million three hundred and sixty four thousand seven hundred and eleven and ninety two cents okay right and you see that um in this case remember the cost increases but in the in in the case of the equipment they actually depreciate in price and

this is where i want us to you know just make and sort of a you know an introduction for what we’re going to do next suppose you wanted to replace the new furniture after six years right so how are you going to do that let’s say you’re going to first of all uh sell the old

furniture second hand right so in this case uh you’re going to sell off the new the old furniture second hand and you’re going to now buy the new furniture right so what that simply means is that you can sell the old furniture let’s say we are using the reducing balance

depreciation okay remember the amount that we got was 347 000 so it means to buy the new furniture you would now need an amount of now note in this case the cost would be 1 million 364 000 and you know that amount but now remember you would now be able to obtain some money from selling the old

furniture so the total amount that you’d need would be the difference between the two so you’d say one million six hundred and three hundred and sixty four thousand seven hundred and eleven uh and ninety two cents minus uh in this case 347 927 and 82 cents right so what would it cost

you now to okay let me just subtract that so that would be 346 927 and 82 cents okay right um so it means the amount that i would need after selling off the old furniture the amount that i would need would be 1 million and 16 000 okay 784 and well 10 cents okay yeah that’s me rounding it off

so this is the amount that i would need now to buy the new furniture now ladies and gents this is where we are going to now talk about sinking funds okay i’m going to talk about that in the next CashNews.co setting up a sinking fund all right but first we’re going to talk about

annuities and make sure that we understand how are we going to set up an account that is going to make sure that in six years time we are able to obtain this amount and as a result um you know we we we don’t lose out uh in terms of uh you know uh the the amount uh that we have we are able to

replace our furniture effectively okay so i think i want to leave my discussion here and i want you to please look out for the next CashNews.co and i promise you i will make it continue making it as simple as possible otherwise i think i’ll see you guys next time i hope you were able to

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