3.01 Discussion: Use Function Models0 A minivan is purchased for $29,248. The va
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Question
3.01 Discussion: Use Function Models0 A minivan is purchased for $29,248. The value of the vehicle depreciates over time. 0 . Describe the advantages and disadvantages of using a linear function to represent the depreciation of the car over time . Describe the advantages and disadvantages of using an exponential function to represent the depreciation of the car over time. . The minivan depreciates $3,000 in the first year. Write either a linear or exponential function to represent the value of the car x years after it was sold.Explanation / Answer
Under linear method of dpereciation the value of the asset reduces by a constant amount each year which is calculated by dividing the cost of the asset net of salvage value by the number of years for which it would be used.
Advantages:
1.The method is simple to use and understand.
2.The method is a widely used accounting method;used by many businesses across the world.
3.It is suitable for assets whose value depreciate uniformaly across its life and whose life can be estimated accurately.
4.As the amount of depreciation is same each year it makes it easy to compare profits..
5.The method is suitable for less expensive assets.
Disadvantages:
1.The method is not suitable when the life of the asstes cannot be predicted with accuracy.
2.All assets do not function at same level throughtout their life,efficiency reduces with time.Thus depreciating it with same value does not seem logical.
3.It is not suitable for assets on which additions are done after ceratin time spam as the same cannot be reflected in the depreciation amount.
Value of the minivan
Purchase price-$29,248
Depreciation in first year-$3,000
Value after X years=$29,248-($3,000*X)
Explanation-The value depreciates by a constant amount of $3,000 every year,so total depreciation after X years is $3,000 times X.
It has been assumed that the salvage value of the van is zero and that the minivan would be depreciated by a constant amount of $3000 every year,expecting the life of the van to be almost 10 years.
Under depreciation using exponential formula or declining balance method the value of the asset net of its salvage values is is depreciated using a certain rate throughout its lifetime.
Advantages:
1.It is useful for assets having higher utility in initial years.More amount is depreciated in the initial yeras when the asste is most efficient and most used.
2.It is useful for tax purpose as more depreciation is charged in the initial years thus the company is able to save on tax early on.
3.It is suitable for assets that lose their value quickly as then the depreciation amount matches with the reduction in the market value.Thus it matches the cost and revenue of the company.
Disadvantages:
1.The method charges very high amount of depreiation in the inital years which might not be suitable for certain assets like plant etc.
2.This method is not suitable for assets which have small life span which are also not of high value.
3.Mostly the entire book value does not get written off in this method.
4.The rate of depreciation is not uniform which might be problem when trying to compare the rates of depreciation.
5.This method is relatively difficult to apply and understand as compared to linear method.
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