Essential Mathematical Formulas for PMP Certification Test
A = B + C
Example
Assume you spent $10,000 on a computer for your project that is projected to last 5 years. To begin using the Double Decline Balance Method, calculate the straight-line depreciation rate, which is 1/5th (since the asset will last 5 years).
With the Double Decline Balance Method, you double this rate and apply it to the asset’s remaining value each year.
Let’s dissect it:
– In year one, the straight-line depreciation rate is one-fifth of $10,000, or $2,000 each year. You double this rate with the Double Decline Balance Method, making it $4,000 for the first year.
– Year 2: After the first year’s depreciation, the residual value is $10,000 – $4,000 = $6,000. For the second year, the straight-line depreciation would be one-fifth of $6,000, or $1,200. For the second year, you double this rate to $2,400 using the Double Decline Balance Method.
– This procedure is repeated until the object achieves its salvage value or becomes unimportant.
This strategy results in greater depreciation charges in the early years, reflecting the assumption that assets lose value more quickly while they are newer and subsequently decline at a slower rate over time.
