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Warning Warning Warning HL Only

More on Scrap Value AO2, AO4

It has been assumed so far that an asset has no value at the end of its life. This is often not the case. When an asset has a scrap or terminal value, it is normal to depreciate the asset using a percentage of its net cost (historic cost less scrap value) for every year of its useful life.

A machine is bought for $1,000,000. It has a life of 10 years, when it will be worth $50,000 as scrap. It is depreciated at 10% per annum.

Cost = $1,000,000
Scrap value = $50,000
Net cost = $950,000 Depreciation = $95,000 per annum.

A car is purchased for the Managing Director for $65,000. It has a life of 4 years, when the car will have a resale value of $15,000. Depreciation rate = 25%

Cost = $65,000

Resale value = $15,000
Net cost = $50,000

Depreciation = $12,500 per annum