Depreciation

Depreciation refers to the loss of value of an asset or the capital stock of a firm over time.[1] To determine the depreciation of an asset the initial cost of the asset, the lifetime of the asset and its salvage value are taken into account. Salvage value is the amount for which an asset can be sold for after its lifetime is done.[2] Depreciation accounting assumes that an asset loses a certain amount of its value per year over its lifetime. Depreciation occurs due to use, obsolescence, decay, wear and tear and other factors.[3]

A wind turbine that lasts for 20 years will be worth less as salvage after that period of time. As an example, assume that the wind turbine costs $585,000 initially. After 20 years of use the wind turbine will be scrapped, and have a salvage value (value of the parts for resale) of $292,500. This means that the depreciation is:

Depreciation = [math]\frac{Initial\ Value\ \ -\ \ Salvage\ Value}{Lifetime\ (years)}[/math]


Depreciation = [math]\frac{\$ 585,000.00\ \ - \ \$ 292,500.00}{20\ yrs}[/math]


= $14,625.00/yr
or
= 2.5% per year

References

  1. J.Black, N. Hashimzade, and G. Myles. (2009) "Depreciation (capital)." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-783?rskey=E0naQn&result=3, 2009 [Aug 8, 2016]
  2. The Handbook of International Financial Terms "Salvage Value." Published by Oxford University Press, edited by Peter Moles and Nicholas Terry.
  3. M. Ragheb. Economics of Wind Energy. Self published, Apr 2015.

Authors and Editors

Lyndon G., Celeste Pomerantz, Jason Donev
Last updated: August 29, 2017
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