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In this course, author Curt Frye shows how to perform a wide range of financial calculations quickly and easily using the many financial functions found in Excel 2010. The course details dozens of functions for evaluating cash flows; calculating depreciation; determining rates of return, bond coupon dates, and security durations; and more.
The most straightforward method you can use to calculate depreciation is the straight line method. As the name implies, the straight line method assigns depreciation evenly over the economic life of the asset. The starting amount is the asset's purchase price and ending value is the asset's salvage value. If your asset has an economic life of 10 years and a salvage value of 0 for example, you will depreciate by 10% each year until its value reaches 0. To calculate straight line depreciation, you use in the SLN function. The SLM function calculates the amount of depreciation for a given period which is usually a year.
And the function takes three arguments. Those are the initial cost, the salvage value which is the amount at which you could sell the item for scrap, and then the economic life, which for a computer is assumed to be 5 years. So let's go ahead and create the formula. So clicking in cell B11, =sln, which is our functions, and a left parenthesis. We have the cost which is in cell b5. Type a comma. Salvage value is in b7, type a comma, and then the economic life in years is in cell b9. Type a right parenthesis.
Everything looks good. And then I will press the Tab key so I don't scroll down. And we see that there is a depreciation of $230 per year and we can verify that's correct by multiplying the depreciation per year, which is 230, by 5 and that gives us a $1,150 and then if we add the salvage value of 150, we get our total of the initial cost. Straight line depreciation is the most conservative approach you can take to depreciation. It assumes that you will hold on to the asset until the end of its economic life so you should spread out the tax benefits of the depreciation while you still own the asset.
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