## Estimate Initial Cost, Useful Life and Residual Value

## Step 1

#### Step

Calculate the initial cost of the asset. The initial cost is the cost of acquiring the asset plus the other costs for making it operational, such as taxes, freight and installation.

## Step 2

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Estimate the useful life of the asset. Useful life is the period of time over which the asset is expected to be used before it needs to be replaced. The useful life can also be the number of production or similar units expected to be obtained from the use of the asset.

## Step 3

#### Step

Estimate the residual value or salvage value of the asset. Residual value is the amount you expect to receive from the disposal of the asset after its useful life. Like the useful life, estimating the residual value requires some judgment, since it may not be possible to precisely know what an asset is likely to be worth at the end of its useful life.

## Use the Straight Line Method

## Step 1

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Calculate the depreciable base by subtracting the estimated residual value from the initial cost of the asset. For example, if the initial cost of the asset is Rs. 50,000, and the residual value is expected to be Rs. 5,000, the depreciable base would be Rs. 50,000 minus Rs. 5,000, or Rs. 45,000.

## Step 2

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Divide the depreciable base by the useful life of the asset to get the annual depreciation amount. If the estimated useful life of the asset is 15 years, then the annual depreciation amount is equal to 45,000 divided by 15, or Rs. 3,000.

## Step 3

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Calculate the rate of annual depreciation by dividing the annual depreciation by the initial cost of the asset and multiplying that number by 100. As per our example, 3,000 divided by 50,000 times 100 is equal to 6 percent per year.

## Use the Written-Down Value Method

## Step 1

#### Step

Calculate the annual depreciation amount by multiplying the rate of depreciation by the written-down value of the asset. For the first year, the depreciation rate will be multiplied by the initial cost, since the asset has not been depreciated yet, so there is no written-down value. Using a depreciation rate of 6 percent, the depreciation amount for year 1 equals 6 percent of Rs. 50,000, or Rs. 3,000.

## Step 2

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Calculate the written-down value of the asset. The written-down value is calculated by subtracting the depreciation per year from the (new) value of the asset. Rs. 50,000 minus Rs. 3,000 equals Rs. 47,000.

## Step 3

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Calculate annual depreciation for the second year based on the new or written-down value of the asset: 6 percent of 47,000 equals Rs. 2,820. The new written-down value will now be Rs. 47,000 minus Rs. 2,820, or Rs. 44,180. The annual depreciation for the third year will now be calculated as 6 percent of Rs. 44,180, and so on.